February 28, 2013

Sonn|Erez Investigating Claims for Investor Losses in The Hartford Floating Rate Fund

Sonn|Erez is investigating claims for investor losses in The Hartford Floating Rate Fund. Hartford Investment Financial Services ("HIFSCO") and Hartford Hartford Life Distributors, LLC, n/k/a Forethought Distributors, LLC ("HLD") recently submitted a Letter of Acceptance, Waiver and Consent ("AWC") with the Financial Industry Regulatory Authority ("FINRA") in which HIFSCO and HLD were censured and fined $100,000. See FINRA No. NO. 2010024617701. The sanctions were imposed in connection with various violations regarding the marketing and advertising of The Hartford Floating Rate Fund, particularly unwarranted and misleading statements made in a brochure entitled "Staying Ahead of the Curve."

According to FINRA, between February 2008 and February 2009 (the "Relevant Period"), HLD prepared and distributed numerous copies the brochure, Staying Ahead of the Curve. HIFSCO approved the brochure for distribution. 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 made statements regarding the Fund that were unwarranted and misleading in light of changing conditions in the bank loan market. 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."

Thus, the Staying Ahead of the Curve brochure portrayed the Fund as appropriate for bond investors concerned about the price stability of their investments, as providing the potential for greater price stability compared with other fixed income investments, and as appropriate for investors seeking some degree of capital preservation. These statements were inaccurate given the prevailing conditions in the bank loan market during the Relevant Period.

The Hartford launched its Floating Rate Fund in April 2005. Between February 2008 and February 2009 (the "Relevant Period"), the Fund's objective was to seek high current income and long term capital appreciation. The Fund invested at least 80% of its assets 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. Therefore, prior to the credit crisis commencing in 2007, the Net Asset Value (NAV) of the Fund was relatively stable.

As explained in the AWC, while floating rate loans are less sensitive to interest rate risk, they are subject to substantial credit risks. Thus, as the credit crisis took hold, the market for senior secured floating rate loans started to become rocky and illiquid. 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.

During the Relevant Period, HIFSCO and HLD were affiliates and wholly-owned subsidiaries of Hartford Financial Services Group Inc., an insurance and wealth management group. HIFSCO is a registered investment advisor and broker-dealer based in Simsbury, Connecticut. Between 2007 and 2009, HIFSCO served as the Chief Investment Advisor and Principal Underwriter and Exclusive Selling Agent for The Hartford Floating Rate Fund, and approved for distribution marketing materials created by Hartford Life Distributors for the Fund. In addition, between 2007 and 2009, HLD served as the Wholesale Distributor of the Fund, and prepared and distributed HIFSCO-approved sales and marketing materials to retail firms that marketed The Hartford family of funds to investors.

The AWC also finds that HIFSCO and HLD failed to establish and maintain supervisory procedures and systems reasonably designed to ensure compliance with FINRA rules, such as ensuring that relevant information and market data about the Fund was conveyed to the individuals responsible for updating the Staying Ahead of the Curve brochure and that all statements in such materials were warranted and were not misleading.

If you invested in The Hartford Floating Rate Fund and suffered investment losses, please contact Sonn|Erez to explore your legal options. Sonn|Erez is a nationally recognized law firm representing individuals, trusts, corporations and institutions in claims against brokerage firms, banks and insurance companies. To learn more, please call us at 866-372-8311 or complete our "contact form."