Leveraged ETFs Lead to $933,000 SEC Fine

Leveraged ETFs Lead to $933,000 SEC Fine

The agency charged an investment advisor and rep with breach of fiduciary duties.

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Reviewed by: Lisa Barr
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Edited by: Sean Allocca

An investor advisor and registered representative will pay $933,000 after the Securities and Exchange Commission charged the parties with breach of fiduciary duty in connection with the use of leveraged exchange-traded funds. 

The SEC noted in a press release that these are settled charges against Fargo, North Dakota investment advisor Classic Asset Management and indirect part-owner and investment advisor representative Douglas G. Schmitz. The fines for the two parties are $195,228 and $738,113, respectively, including prejudgment interest and civil penalties.  

CAM also agreed to conduct a respondent-administered distribution, which is a way for CAM and Schmitz to reimburse funds to investors harmed by them, according to an SEC spokesperson, adding that some clients experienced “substantial losses.” 

“Investment advisors have fiduciary duties to act in their clients’ best interest, and this is particularly important when investing clients in complex products such as leveraged ETFs," SEC’s Denver regional office director Jason J. Burt said in a press release.  

Without admitting or denying the commission’s findings, CAM and Schmitz accepted a cease-and-desist order and censures, according to the release.  

Burt also noted that "complex products present unique risks, and investment advisors must ensure that there is a reasonable basis to recommend these products before purchasing them for clients."  

Neither CAM nor Schmitz responded to a request for comment. In an SEC filing, CAM reported $158 million in assets under management held in 1,891 accounts, representing 917 clients.  

The SEC alleged that between at least January 2017 and December 2020, CAM and Schmitz ignored warnings that particular leveraged ETF funds, such as the ProShares UltraPro Dow 30 (UDOW), used for invested advisory clients carried “unique” risks, outlined in the funds’ prospectuses, according to the SEC order. The leveraged ETFs were meant to be held for only a single day and needed frequent monitoring, the agency said.  

However, Schmitz held some of the leveraged ETFs in clients’ accounts for weeks, months and years, according to the SEC order. CAM and Schmitz did not live up to their duty to evaluate whether holding the leveraged ETFs were in their clients’ best interest, according to the agency. 

The order also noted that CAM and Schmitz violated the Investment Advisers Act of 1940, and that CAM also violated the act’s compliance dictates. The act requires that advisors with at least $100 million in AUM or those that advise a registered investment company register with the SEC.  

 

Follow Michelle Lodge on Twitter @lodgemich 

Michelle Lodge is a journalist who is a contributor to many sites: Fortune, Money, Time, Barron’s, Investopedia, CNBC.com and Bloomberg.com.