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Regulation and Compliance > Federal Regulation > SEC

SEC Fines Firm $1M Over Marketing Rule Violations

By Melanie Waddell

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What You Need to Know

  • WAM made material misstatements and omissions concerning an index it created to depict the performance of its convertible bond investment strategy.
  • The firm also published, circulated and distributed ads that contained misleading statements.
  • WAM also failed to design and implement written compliance policies and procedures regarding advertising-related disclosures.

The Securities and Exchange Commission has fined another advisory firm for marketing rule-related violations.

On Monday, the SEC said that it had levied a $1 million penalty against Wellesley Asset Management for making material misstatements and omissions in marketing materials to certain advisory clients and prospective ones concerning an index that WAM created in January 2013 to depict the performance of its convertible bond investment strategy from January 2000 forward.

WAM used WAM Index performance graphs in advertisements from February 2015 to March 2022, a period when WAM’s investment strategy focused exclusively on convertible bonds, the SEC order explains.

“WAM’s written advertisements, however, failed to fully and fairly disclose the methodologies it used to construct the index,” the SEC said.

Among other things, WAM at times failed to adequately disclose that the WAM Index included hypothetical performance, according to the order.

“WAM also presented the WAM Index’s performance during at least three client webinars and misstated that the WAM Index represented composite returns from its convertible bond strategy,” the order states.

WAM voluntarily discontinued advertising the WAM Index in March 2022.

WAM violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1 thereunder by publishing, circulating, and distributing advertisements that contained misleading statements of material fact.

In addition, WAM failed to design and implement written compliance policies and procedures regarding advertising-related disclosures in violation of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder.

Wellesley Asset Management Inc. is a Massachusetts corporation with its principal place of business in Wellesley, Massachusetts.

As of March 2023, WAM reported approximately $2.4 billion of regulatory assets under management and invests on behalf of approximately 1,800 clients.

Most of WAM’s clients are individuals who invest in its convertible bond strategy; WAM also advises three registered mutual funds, two private funds, pensions, charities, insurance companies and corporations.

Sara Crovitz, partner at Stradley Ronon in Washington, said Monday in an email that the SEC’s action against Wellesley “is based on the old marketing rule. It’s interesting that the SEC is still bringing enforcement action under the old marketing rule, but it could be that the [SEC] staff’s investigation of this adviser began prior to adoption of the new marketing rule.”

The SEC said that in determining to accept the offer, it considered remedial acts promptly undertaken by WAM.

In March 2022, WAM voluntarily discontinued its use of the WAM Index in WAM’s advertisements, the SEC order states, and WAM is now in the process of terminating its contract with the WAM Index calculation agent so that the WAM Index will cease to exist.

Also, after discontinuing its use of the WAM Index in its advertisements, WAM retained outside legal and compliance professionals to conduct a review of its marketing materials and policies and procedures with respect to the Commission’s current Investment Adviser Marketing Rule that became effective on Nov. 4, 2022.

WAM has also engaged an outside compliance consultant to conduct a review of its current policies and procedures pertaining to, among other areas, performance advertising, including the use of hypothetical performance, speaking engagements with clients or prospective clients, including the use of scripts or talking points in connection with such engagements, and employee training related to compliance with the new Marketing Rule, the SEC order states.

Melanie Waddell

@Think_MelanieW

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