After nearly a year of SEC scrutiny, a high-flying mutual fund sub-advisor that specializes in managed portfolios of ETFs is facing possible action.

Last week in its new form ADVs filed with the regulatory agency, Wellesley, Massachusetts-based F-Squared Investments revealed that the SEC sent it a Wells notice on August 13 [see the new ADVs for F-Squared Alternative Investments, F-Squared Institutional Advisors, F-Squared Investments, Inc. and F-Squared Retirement Solutions]. The notice means that the SEC is recommending that the SEC take action against F-Squared "alleging violations of certain provisions of the Federal securities laws."

Chris Dieterich of the Wall Street Journal broke the news of the Wells notice. F-Squared informed clients of the SEC's in a letter in May, and also in October 2013.

The SEC's investigation, which began last fall, involves the performance record of F-Squared's AlphaSector U.S. equity indexes, specifically between April 2001 and September 2008. F-Squared's filing explains:

In September 2008, F-Squared acquired the data signals used in performance reporting for the April 2001 through September 2008 period from a third party data provider that was related to a wealth management firm. Before the references were removed in October 2013, certain F-Squared advertisements included statements that the AlphaSector U.S. equity index performance records were based on buy and sell signals that had been used by a wealth management firm to make investment decisions from April 2001 through September 2008. In May 2014, F-Squared notified clients that the Staff had informed the company that the wealth management firm had not used these buy and sell signals to manage client assets, and therefore the buy and sell signals that the F-Squared index returns were based on were not linked to live assets. In addition, in May 2014, the notification indicated that there was an error in the calculation of the indexes. This resulted in a substantial overstatement of the AlphaSector U.S. equity index performance record for the period April 2001 through September 2008.

In the filing, F-Squared goes on to note that the notice from the SEC is "neither a formal allegation of nor a finding of wrongdoing," and adds that the firm "has been cooperating with the Staff in its investigation":

"F-Squared intends to respond to the Wells notice and to continue to cooperate."

F-Squared sub-advises the two Virtus AlphaSector mutual funds (roughly $10.9 billion in combined AUM) and the three Reliance Trust AlphaSector collective trust funds (targeted at 401(k) plans). 

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