Unjumbling the world of financial advertising—this could be a full-time job! Just ask Wellesley Asset Management (WAM). The Massachusetts-based RIA recently experienced a rocky journey straight out of a roller-coaster ride.
The Million-Dollar Boo-Boo
Well, here’s the tea: Wellesley Asset Management is now a quite bit lighter… by a million dollars! And the cause for this weight loss? Turns out, they agreed to part with $1 million as a civil penalty for some ill-advised advertising tactics. They were showcasing hypothetical performance information without laying out the necessary clarifications. Ouch!
And guess what? That’s not all. WAM also consented to a cease-and-desist plus a censure. But here’s a twist—no admissions, no denials to the commission’s discoveries. Talk about a cliffhanger!
Thinking “Hey, isn’t there a rule against these sneaky moves?” Well, yes, there’s the commission’s Ad Rule, but it doesn’t apply here. See, WAM’s alleged foul play occurred before the rule’s compliance date. A classic case of bad timing, wouldn’t you agree?
A Quick Trip Down Memory Lane with Wellesley
Stepping into the scene in the early ’90s and registering with the SEC in 2002, Wellesley is no spring chicken. As of recent times, they’ve been managing a nifty $2.4 billion in assets and catering to around 1,800 clients. And their clientele list isn’t just your typical Joe. They have mutual funds, private funds, pensions, charities, and even corporations under their advisory wing. Impressed yet?
The Infamous WAM Index Saga
Fast forward to 2013, WAM made the decision to birth the WAM Index in partnership with Thomson Reuters, (which eventually turned into Refinitiv). The index was WAM’s brainchild to explain their convertible bond strategy. But hold your horses-the chronicle takes a turn towards intrigue from here.
Here’s the rub. Despite forming the index in 2013, the performance timeline started back in January 2000. Suspicious, right? Hold on to your sippy cups because we are about to spill some more tea.
The index was carefully curated using real convertible bond trades stemming from their client accounts (January 2000 to February 2002). Furthermore, these holdings were grouped as if they belonged to one solitary account. From February 2002 to December 2012, however, the index performance was based on an imaginary portfolio. Can you believe that? A portfolio that never actually made any investments!
Post 2013, the index performance mimicked the convertible bonds in a WAM mutual fund. WAM set out marketing this index to both potential and current clients. But hang on—there’s a backflip in the narrative. The Commission discovered that WAM’s disclosures were rather underwhelming.
During client webinars, WAM flaunted these index performance measures, pitching that the index reflected “composite returns” from their convertible bond strategy. But as they say, “All that glitters is not gold.” They halted using these index advertisements in March 2022, but, boy oh boy, the wounds were already inflicted.
Onwards and Upwards
Reacting to the brouhaha, a spokesperson from Wellesley stated, “Wellesley is pleased to put this matter regarding marketing disclosures behind us.” WAM’s strategy moving forward is to collaborate with third-party law and compliance firms to be on the level with the current advertising regulations. The SEC did tip their hats to WAM’s measures to rectify these compliance issues. They’ve refrained from advertising the index and are discontinuing their contract with the index calculation agent, hence waving goodbye to the index.
The Wrap Up
Financial advertising isn’t for the faint-hearted. It’s a field where authenticity is paramount and even the smallest sidesteps can trigger significant penalties. The story of Wellesley is a wake-up call, offering a stark reminder of the value of integrity and lucidity in the finance sphere. Better safe than sorry, right?
To dig deeper into this baffling saga, you can check out their FINRA CRD number!
