The Securities Arbitration Law Firm of KlaymanToskes announced today that it is investigating claims concerning losses sustained by investors in The Hartford Floating Rate Fund. Earlier this year, Hartford Investment Financial Services (“HIFSCO”) and Hartford Hartford Life Distributors, LLC, n/k/a Forethought Distributors, LLC (“HLD”) entered into a Letter of Acceptance, Waiver and Consent (“AWC”) with the Financial Industry Regulatory Authority (“FINRA”) relating to several violations in connection with The Hartford Floating Rate Fund.
According to FINRA, “During the Relevant Period, HLD prepared and distributed numerous copies of a brochure called Staying Ahead of the Curve. The brochure discussed features of the Fund as an investment and was provided to downstream selling broker-dealers for use in the marketing and sale of the Fund to those firms’ customers. The brochure was approved for distribution by HIFSCO. The brochure made statements regarding the Fund that were unwarranted and misleading in light of changing conditions in the bank loan market. In particular, the brochure contained misleading statements that the Fund was appropriate for bond investors concerned about the price stability of their investments, provided the potential for greater price stability compared with other fixed income investments, and was appropriate for investors seeking some degree of capital preservation. Given the conditions in the bank loan market during the Relevant Period, these statements were not accurate. The Respondents also failed to establish and maintain supervisory procedures and systems that were reasonably designed to ensure compliance with FINRA rules. Among other things, the firms’ procedures were not reasonably designed to ensure that relevant information and market data about the Fund was conveyed to the individuals responsible for updating the Staying Ahead of the Curve Piece and that all statements in such materials were warranted and were not misleading.” The AWC went on to explain FINRA’s findings and violations of the Respondents in further detail, as set forth below.
The Hartford Floating Rate Fund
Hartford’s Floating Rate Fund was launched in April 2005. During the Relevant Period, the Fund’s objective was to seek high current income and long term capital appreciation. At least 80% of the fund’s assets were invested in senior secured floating rate bank loans extended to companies rated below investment grade and in below investment-grade fixed income securities. Because the interest rates on the types of loans in the portfolio periodically reset, their prices are typically less sensitive to interest rate changes. Before the credit crisis that began in the fall of 2007, the Net Asset Value (NAV) of the Fund was relatively stable.
While floating rate loans are less sensitive to interest rate risk, they are subject to substantial credit risks. As the credit crisis first began to unfold in mid-2007, the market for senior secured floating rate loans began to experience turbulence and become less liquid. By February 2008, the NAV of the Fund began to fluctuate significantly as it was forced to sell portfolio holdings into the market at a discount in order to raise cash to meet large fund outflows, and to cut the valuations on remaining portfolio holdings to reflect their market value. By December 2008, the Fund’s NAV had decreased by nearly 40% from its pre-credit crisis levels, and by February 2009 the Fund’s NAV was down by approximately 33%. The fluctuation of the Fund’s NAV during this time was similar to the price movements of many other high-yield fixed income securities and funds.
The Staying Ahead of the Curve Brochure
The Staying Ahead of the Curve brochure was first created by HLD before 2007. It described various attributes of the Fund as an investment. The brochure was intended for use by selling firms with those firms’ customers in the marketing and sale of the Fund. The brochure was approved by HIFSCO for distribution to selling firms and for use with customers at least twice during the Relevant Period. Among other things, the brochure contained the following statements:
“Who may benefit from this fund?
• Bond investors concerned about the price stability of their investments,
• Investors seeking moderately high income along with some degree of capital
preservation.”
“If you find a fund which provides potential for greater price stability compared with other fixed income investments, then you have found The Hartford Floating Rate Fund.”
HIFSCO and HLD Failed to Update the Staying Ahead of the Curve Marketing Piece. As Chief Investment Advisor to the Fund, HIFSCO monitored Fund performance and advised and made recommendations to the Fund’s board of directors concerning investment strategy. In this role, HIFSCO was aware of the Fund’s performance and of the market conditions relating to the Fund. By November 2007, HIFSCO reported to the Fund’s board problems in the loan market that led to a number of large loan issuances being pulled from the market and that could lead to possible future defaults. HIFSCO also reported that in the previous quarter, the Fund had experienced significant volatility in its performance as a result of holding a higher concentration of lower quality loans and
loss of liquidity in the market.
Furthermore, the Fund had been required to sell assets to meet investor outflows. In early February 2008, as the credit crisis worsened, HIFSCO provided another update on the Fund to the board. At this time, HIFSCO reported to the board that volatility in the fixed income markets had continued throughout the previous quarter, and acknowledged that what had been thought to be a short-term market volatility issue for the Fund was continuing. The statements described above that were contained in the Staying Ahead of the Curve brochure were unwarranted and misleading. They did not accurately reflect the conditions in the bank loan market and the effect of those conditions on the Fund during the Relevant Period. However, HIFSCO and HLD continued to use the Staying Ahead of the Curve brochure without revising these statements. HIFSCO and HLD did not remove the statements until on or about February, 21 2009.
As approved by HIFSCO and distributed by HLD throughout 2008, the brochure continued to inaccurately characterize the Fund as “providing potential for greater price stability compared with other fixed income investments” and as appropriate for “investors concerned about the price stability of their investments” and “seeking . . . some degree of capital preservation.” In fact, during this period, the Fund was not demonstrating greater price stability relative to other fixed income investments.2 Between February 2008, when HIFSCO became aware of conditions that rendered the
statements inaccurate, and the removal of the statements in February 2009, HLD submitted the Staying Ahead of the Curve for HIFSCO’s approval at least twice. HIFSCO approved the brochure for distribution both times. Consequently, during this period HLD distributed approximately 2,450 copies of Staying Ahead of the Curve containing the misleading statements to downstream selling firms for use with their customers.
Although the concerns regarding the market for senior loans and the Fund’s increased volatility were reported to the Fund’s board, none of the HIFSCO employees responsible for approving the Fund’s advertising materials participated in the meetings where these concerns were discussed. The Respondents’ written supervisory procedures also lacked any mechanism for ensuring that those responsible for drafting or reviewing advertising materials would be informed of material facts concerning relevant conditions in the bank loan market or the Fund’s performance. As a consequence, over a period of 12 months, HIFSCO approved, and HLD continued to distribute, thousands of copies of the Staying Ahead of the Curve brochure that contained unwarranted and misleading statements.
Violations
Based on the foregoing, between February 2008 and February 2009, HIFSCO and HLD violated NASD Rule 2210 by distributing numerous copies of the Staying Ahead of the Curve brochure containing statements that, in light of conditions in the bank loan market, were unwarranted, misleading, not balanced, or that failed to provide a sound basis upon which to evaluate the Fund. During the same period, HIFSCO and HLD also violated NASD Rules 3010(a) and 3010(b) by failing to establish, maintain and enforce supervisory systems that were reasonably designed to achieve compliance with NASD Rule 2210. By virtue of these violations, HIFSCO and HLD also violated NASD Rule 2110 for conduct before December 15, 2008 and FINRA Rule 2010 for conduct after December 14, 2008.”
As a result, HIFSCO and HLD consented to the imposition of a censure and fine of $100,000.
Investors of The Hartford Floating Rate Fund who sustained losses of $100,000 or more are encouraged to contact KlaymanToskes to explore their legal rights and options. KlaymanToskes can be reached toll free at 888-997-9956.