RIA Compliance Blog
The Securities and Exchange Commission recently issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Massachusetts Financial Services Company (“MFS”), an SEC-registered investment adviser. According to the SEC’s Order, MFS advertised hypothetical returns pertaining to its blended research stock ratings without informing clients that a number of the hypothetical portfolios’ superior returns were based on back-tested models. Without admitting or denying the allegations in the SEC’s Order, MFS submitted an offer of settlement to resolve the matter.
According to the SEC’s Order, MFS has employed a quantitative-based research department since 2000. In 2000, the department developed what MFS calls “blended research” strategies, which involve “combining fundamental and quantitative ratings to arrive at a blended stock score, and by using a portfolio optimization process that considers the blended scores along with risk and other portfolio constraints.” As of May of this year, MFS had approximately $21 million in assets under management invested in blended research strategies.
The SEC’s Order alleges that from 2006 through 2015, MFS created research proofs based on the blended research analysis. The data and a bar chart describing the analysis were featured in MFS advertisements. MFS subsequently used the bar chart in three different kinds of marketing materials: in a standard slide deck from 2006 through 2015, in responses to formal requests from clients starting in 2012, and in a white paper that discussed MFS’s blended research strategies. These materials were marketed exclusively to institutional clients, prospective institutional clients, financial intermediaries, and investment consultants.