A Massachusetts-based RIA will pay a civil penalty of $1 million to settle charges that it inappropriately used hypothetical performance information in advertisements without proper disclosures.

Wellesley Asset Management also agreed to a cease-and-desist and censure without admitting or denying the commission’s findings. Though hypothetical performance lapses have been at the center of recent enforcement actions stemming from the commission’s Ad Rule, the rule doesn’t pertain to this case since Wellseley’s alleged non-compliance happened before the rule’s compliance date.

Founded in 1991, Wellesley registered with the SEC in June 2002, and as of March, had about $2.4 billion in managed assets and approximately 1,800 clients. In addition to individual clients, the firm also advises mutual funds, private funds, pensions, charities, insurance companies and corporations.

Starting in 2013, Wellesley Asset Management (WAM) created the WAM Index as a means to explain its convertible bond strategy, partnering with Thomson Reuters (later rebranded as Refinitiv) to calculate the index. Although the company formed the index in 2013, it depicted performance starting in January 2000, according to the commission’s order.

To create the index, performance data from January 2000 through February 2002 was based on actual convertible bond trades in WAM client accounts, with the RIA grouping the holdings together as if they were in one account. For February 2002 through December 2012, the firm calculated the index performance using trades in a hypothetical portfolio that didn’t actually make investments. 

After 2013, when the index was created, its performance tended to track convertible bonds held in a WAM registered mutual fund. The firm began marketing the index to potential and current clients, including disclosures, but the commission said revisions to the disclosures “did not adequately disclose the methodologies used to create the index.” 

In particular, the revisions didn’t reveal that early index performance was based solely on convertible bond holdings in separately-managed client accounts. The disclosures stated that the later performance for the index was based on a model portfolio, but the firm didn’t maintain such a portfolio. Instead, the performance during that time was based on the securities held in the hypothetical portfolio.

According to the commission, WAM presented index performance metrics during at least three client webinars and misstated that the index represented “composite returns” from its strategy with convertible bonds, while additional revisions to the firm’s disclosures failed to address its use of hypothetical performance (the firm stopped using index advertisements in March 2022).

“Wellesley is pleased to put this matter regarding marketing disclosures behind us,” a spokesperson for the firm said. “We continue to work with third party legal and compliance firms to review our marketing materials regarding compliance with current marketing rules.”

The firm’s legal and compliance assistance was in the midst of reviewing its policies and procedures particularly to ensure the firm was complying with the Ad Rule, according to the commission.

The SEC acknowledged WAM’s attempts to remediate the compliance lapses in the order. In addition to ending the ads for its index, the firm is ending its contract with the index calculation agent, which will end the index altogether. 


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