Exchange Traded Funds

Pimco Gets Wells Notice Over Markings of Total Return ETF

Published on: August 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Pacific Investment Management Co. said that the SEC has sent it a Wells notice indicating that its staff is recommending that the regulator file a civil case against the financial firm over the way securities were marked in its PimcoTotal Return Active Exchange-Traded Fund. That’s the ETF version of Pimco’s Total Return Fund.

The Wells notice is related to the valuation of smaller positions in mortgage-backed securities that the government did not guarantee for several months in 2012, as well as disclosure regarding performance and procedures and policies related to compliance. Bloomberg reports that according to someone that knows bout the investigation, The regulator has been looking at whether the total return ETF bought small lots of bonds at a discount price and marked them up when valuing holdings to artificially inflate returns.

Although the ETF has continued to see deposits, the Total Return mutual fund experienced redemptions, especially after the departure of founder Bill Gross last year. News of his exit came within days of the news that the SEC was probing whether Pimco had inflated ETF returns.

FINRA Orders Morgan Stanley to Pay $2.4M Over Ex-Broker’s Trades, Bars Former Merrill Lynch Trader from the Industry

Published on: July 28, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A Financial Industry Regulatory Authority panel arbitration panel says that Morgan Stanley (MS) must pay at least $2.4M to settle the latest client claims accusing its former broker, Steven Mark Wyatt, of mishandling their investments. The brokerage firm fired Wyatt in 2012.

According to a group of doctors and their loved ones, Wyatt, who was their broker, made unauthorized and excessive trades in the stock market that cost them during and after the 2008 financial crisis. Wyatt bought thinly-traded stocks for the investors and placed speculative bets on exchange-traded funds and other securities in their portfolios.

This is the latest batch of claims against Wyatt, Morgan Stanley, and managers at the Mississippi branch where he worked. The claimants believe that Morgan Stanley failed to detect warning signs of Wyatt’s purported wrongdoing. Other employees named in this securities case are adviser Hilary Zimmerman, currently a Morgan Stanley senior vice president, and branch manager Fred Eugene Brister III. The claimants contend that Brister failed to properly supervise Zimmerman and Wyatt. They say that their accounts were mismanaged and suspect trading occurred.

F-Squared Files for Chapter 11 Bankruptcy

Published on: July 8, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Exchange-traded fund manager F-Squared Investments Inc. has filed for bankruptcy. The firm wants the U.S. Bankruptcy Court for the District of Delaware to allow it to sell its intellectual property, including its investment strategies and contracts to manage money, to Broadmeadow Capital, a Chicago-based money manager.

It was in December that F-Squared agreed to pay investors $35 million to settle Securities and Exchange Commission charges alleging that the firm misled investors about the performance of its Alpha Sector investment strategy. The regulator said that the ETF fund manager falsely marketed the strategy as having a successful track record that was based on actual performance.

Instead, contends the SEC, the data was from a hypothetical performance for a past period that was generated from backtesting. Also, a performance calculation error caused results to be inflated by 350%.

Advisers were attracted to this inflated performance record and F-Squared’s contention that its strategy could get around tough market shifts by engaging in opportunistic trading in and out of multiple industrial-sector ETFs. In seven years, the firm went from being practically a nonentity to having a $28.5 billion strategy as of last year.

F-Squared became the largest marketer of index products using ETFs. By the end of the year that ended in March 2015, however, the firm experienced a close to $8 billion asset decline. It reduced its workforce by 25%.
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Investor Want Wells Fargo Advisers to Pay $100K in Damages Over F-Squared Investment Losses

Published on: June 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

A client of Wells Fargo Advisors (WFC) is looking to recover at least $100,000 in damages for losses he sustained from investing with F-Squared Investments Inc. The arbitration case comes six months after F-Squared consented to pay $35 million to resolve Securities and Exchange Commission charges accusing the asset manager of making false claims about its flagship investment product’s performance. The 68-year-old widower’s claim will test whether investors can pursue broker-dealers for selling F-Squared products.

The claimant, a moderately conservative investor who was looking for moderately conservative growth for his retirement account assets, began working with a Wells Fargo financial adviser in 2011. The brokerage firm made F-Squared managed-accounts available to advisors in 2013.

According to InvestmentNews, The investor’s advisor put about $900K of the client’s money-most of his savings, says his attorney-in products managed by two ETF strategists. Over 50% of the money went into F-Squared’s AlphaSector Allocator Select. Meantime, the investor said it paid Wells Fargo about $19,000 in fees for recommending the products. He believes that the firm had a conflict when it recommended investments because they came with such high commissions. Also, the fees erased potential capital gains for the claimant.
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SEC’s Stein Wants Regulator to Take a Closer Look at Exchange-Traded Funds and Alternative Mutual Funds

Published on: June 22, 2015 | by Shepherd Smith Edwards & Kantas, LLP

Kara Stein, an SEC commissioner, is calling on the Securities and Exchange Commission to examine whether exchange-traded funds and alternative funds are managing to get around certain rules and placing investors at risk. Stein said that both types of funds, which use high-risk complex investment strategies or place their money in illiquid assets, frequently “operate in a gray area” when it comes to regulation.

During a speech at the Brookings Institution, the SEC Commissioner noted that alternative mutual funds, which act like hedge funds and are often called liquid alts, don’t have to abide by the Investment Company Act of 1940 rules regarding leverage and liquidity. Stein said that the promise of benefits like those that come with investing in hedge funds along with liquidity of more traditional mutual funds are part of why alternative mutual funds appeal to investors. However, alternative mutual funds don’t necessarily provide the protections that accompany their more traditional counterparts.

Now, Stein is suggesting that the SEC propose rules regarding liquidity and the use of derivatives in alternative mutual funds. She said that the industry and regulators should ensure that retail investors continue to receive protections.

Earlier this month, the SEC announced that it is open for feedback from the public to help determine how to best review the listing and trading of unusual, new, or complex exchange-traded products. Because investment strategies of ETPs have expanded in recent years, there has been a growth in the amount of new ETPs and kinds of complexities. Meantime, individual and institutional investors continue to seek out these types of products.

Advisors Favor Exchange-Traded Funds

Published on: June 5, 2015 | by Shepherd Smith Edwards & Kantas, LLP

CNBC reports that according to a recent survey, advisors are preferencing exchange-traded funds over any other investment choice, in part because of their transparency, liquidity, and low costs. ETFs can also be traded throughout the day and are primarily passive. Their expense ratio is lower than actively managed mutual funds and they offer certain tax benefits. For example, unlike with mutual funds, capital gains are not as likely to arise with exchange-traded funds.

In the 2015 Trends in Investing Survey, conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, 81% of advisors said that they recommend or use ETFs—that’s significantly up from 2006 when the survey found that just 40 % of advisors used exchange-traded funds. Meantime, Morningstar, an investment research firm, reports that ETFs hold about $2.1 trillion of investor assets. However, the use of smart-beta ETFs is still low.

Ex-F-Squared CEO Still Battling SEC, Firm Dealing With Fallout from Securities Fraud Charges

Published on: March 27, 2015 | by Shepherd Smith Edwards & Kantas, LLP

F-Squared Investments Inc. has laid off 40 workers-that’s one-fourth of its staff-as it continues to deal with the ongoing asset losses in the wake of the securities fraud charges filed against it by the U.S. Securities and Exchange Commission last year. During a routine examination, the regulator discovered that the asset management company allegedly had deceived investors by claiming its performance history was based on a real trading record going as far back as 2001 when F-Squared had just back-tested its algorithm. F-Squared is the biggest marketer of index products using ETFs (exchange-traded funds).

The SEC accused the firm of falsely promoting its AlphaSector investment strategy and its supposed excellent track record as based on its investment performance for real clients instead of the backtesting. Due to a calculation error, the results were inflated by 350%.

F-Squared settled the SEC charges for $35 million and the firm’s new CEO, Laura P. Dagan, said that F-squared has been putting more effort into compliance and its main product line. However, in the last several months, investors have withdrawn billions of dollars from F-squared strategies while several brokerage firms refuse to let advisers put more funds into the strategies.

Investment Adviser Fraud Cases Lead to Civil Charges, Criminal Convictions, and Investor Losses

Published on: January 21, 2015 | by Shepherd Smith Edwards & Kantas, LLP

SEC Accuses Elm Tree Investment Advisors, its Founder, of $17M Securities Fraud

The Securities and Exchange Commission has filed fraud charges against Elm Tree Investment Advisors LLC and its founder Frederic Elm for running a Florida-based securities scam that raised over $17 million in a little over a year. The regulator contends that Elm, his firm, and the funds Elm Tree Motion Opportunity LP, Elm Tree “e”Conomy Fund LP, and Elm Tree Investment Fund LP misled investors and used the bulk of the funds to issue Ponzi-like payments. Elm also is accused of using the money to purchase expensive homes, jewelry, and autos, as well as cover his daily living expenses.

According to the SEC, Elm, his unregistered advisory firm, and the three funds violated the regulator’s anti-fraud rules as well as federal securities laws. The Commission wants relief for investors as well as the restoration of the purportedly ill-gotten gains and financial penalties.

Exchange-Traded Fund Strategist F-Squared to Pay $35M to Settle Charges that It Misled Investors

Published on: December 24, 2014 | by Shepherd Smith Edwards & Kantas, LLP

F-Squared Investments Inc. has consented to pay $35M to settle Securities and Exchange Commission charges accusing the firm of making false claims regarding the performance of a key investment product. F-Squared admitted that it misled clients for several years about its AlphaSector strategy.

F-Squared is the largest marketer of index products that use Exchange-Traded Funds. The SEC claims that F-Squared falsely advertised that the AlphaSector investment strategy had a successful track record that was based on actual investment performance for real clients when, in fact, the algorithm touted didn’t even exist during the noted time period.

The algorithm was the basis of signals sent from a third party data provider indicating when to sell or buy an investment. F-Squared and Howard Present, its co-founder and ex-CEO, used the signals to develop the AlphaSector, a model portfolio of sector ETFs that could be rebalanced from time to time when the signals changed. After its launch in 2008, AlphaSector’s indexes became the company’s largest revenue source.

SEC to Reject BlackRock Inc. Proposal for Nontransparent Exchange-Traded Fund

Published on: October 23, 2014 | by Shepherd Smith Edwards & Kantas, LLP

In a preliminary ruling, The U.S. Securities and Exchange Commission said it expects to reject BlackRock Inc.’s (BLK) proposal to put out a nontransparent exchange-traded fund. BlackRock sought permission to sell the ETF from the regulator in 2011.

The fund wants to keep its investments secret, which go against SEC rules. BlackRock proposed using a blind trust to manage the securities of a portfolio without revealing the contents. It sought exemption from the agency’s rules, which mandate that disclosure be provided daily. Instead, BlackRock would have disclosed its holdings with the nontransparent ETF on a quarterly basis. One reason that certain fund managers are pushing for less frequent disclosure is their worry that daily disclosures could allow investors to imitate the trades.

Now, however, the SEC is saying that without portfolio transparency such as a plan does not guarantee that that the ETF would trade consistently or near net asset value. The regulator said that the proposed structure sets up substantive risk that ETF share market prices might materially deviate from the ETF’s NAV/share, especially during stressful periods in the market. This could “inflict substantial cost on investors,” noted the Commission.