F-Squared Investments Inc., one of the largest managers of investment products built using exchange-traded funds, said U.S. regulators were considering a civil action against the firm over performance claims made in the firm's advertising materials.
The firm, which oversees $27.7 billion, received a Wells notice from the Securities and Exchange Commission on Aug. 13 informing it that SEC staff recommends an action, the Wellesley, Mass.-based firm said in a filing submitted Aug. 29.
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F-Squared, whose assets have grown from about $3 billion in 2011, had told clients in October it was under investigation by the SEC over its advertised performance records from April 2001 through September 2008, which the regulator later found contained errors and weren't based on actual client assets. F-Squared is among the most prominent firms in a fast-growing investing niche, specializing in actively managed accounts that use ETFs instead of single stocks or bonds as their holdings.
“F-Squared has taken significant steps in recent years to improve its controls to ensure that these sorts of problems will not recur,” the company said in a statement. The performance claims in question were removed from all marketing materials in October.
Brokerage firms RBC Wealth Management, Raymond James Financial Inc. and Wells Fargo Advisors have previously pulled back on how much new business their advisers can do with F-Squared, according to a person with knowledge of the matter, who asked not be named because the information is private.
The decision by the brokerages was reported Wednesday by the Wall Street Journal. Anthea Penrose, a spokeswoman at Raymond James, declined to comment on the move, as did Nicole Garrison, a spokeswoman at RBC, and Rachelle Rowe, a spokeswoman for Wells Fargo Advisors. F-Squared said in its statement it intends to respond to the SEC and that it will continue to cooperate.
“It is the first big ETF strategist that has gotten into hot water,” said Dave Nadig, chief investment officer of ETF.com. The Wells notice “will hinder their business because asset management is based on trust. It's hard to trust someone when the SEC is knocking on their door,” Nadig said.
ETFs are bundles of securities that trade like a stock on an exchange and typically track an index. In the actively managed accounts niche, there were 145 firms tracking 667 strategies with $102 billion in assets as of June 30, according to research firm Morningstar Inc.
The SEC sends a Wells notice to a company or an individual after its staff has determined that sufficient wrongdoing has occurred to warrant civil claims being filed.