SEC Charges ND Advisory Firm Classic Asset Management and Advisor with Unsuitable Leveraged ETFs
According to an announcement on May 4, 2023, the SEC ordered Classic Asset Management, a North Dakota investment advisory firm, and one of its advisors to pay $933,341 in monetary sanctions for misusing leveraged exchange-traded funds in client accounts.
The Securities and Exchange Commission charged Classic Asset Management, and investment advisor Douglas Schmitz with violating their fiduciary duty to clients by recommending the complex ETFs without understanding the risks and whether they were in the clients’ best interests.
Classic Asset Management and Schmitz allegedly ignored the front page of leveraged ETF prospectuses that the investments carried unique risks, were only to be held for a single trading day and required close monitoring. Instead, they invested advisory clients in the leveraged ETFs for extended periods of time and in highly concentrations.
Between January 2017 through December 2020, Schmitz invested about 220 of his 290 clients in the complex ETFs, which they held in their accounts for an average of more than 330 days, according to the complaint. Less than 1% of the leveraged ETFs were sold within one day.
The SEC also said that neither Schmitz nor the firm had any reason to believe the leveraged ETFs were suitable for their clients. Further, Classic Asset Management and Schmitz allegedly failed to monitor the investments to assess whether they were in their clients’ best interests throughout the holding period.
The SEC ordered the firm to pay $195,228 and Schmitz to pay $738,113.
Leveraged ETFs may not be Suitable
Leveraged ETFs are designed to deliver multiples of the indices on which they are based using complex strategies. Leveraged ETFs, or exchange-traded funds, are investment products designed to amplify the returns of an underlying index by using financial derivatives such as swaps, futures, and options. They are known as “leveraged” because they use borrowed money to increase their exposure to the underlying index.
While leveraged ETFs may offer the potential for higher returns, they also come with significant risks.
Regulation Best Interest – REG BI
“Regulation Best Interest,” approved by the SEC in 2019, requires financial advisors to put clients’ interests before their own. Although the rule has been in effect since the beginning of 2020, REG BI enforcement actions are just coming into play during the past few months.
Under Reg BI, brokers must disclose the nature of their relationship with their clients and provide important information about the investment products they are recommending. Brokers must also exercise reasonable diligence, care, and skill when making investment recommendations, considering the client’s investment profile, including their financial situation, investment experience, investment objectives, and risk tolerance.
Reg BI also requires brokers to put policies and procedures in place to identify, address, and mitigate conflicts of interest that may arise in connection with their recommendations. This includes any financial incentives that brokers may receive for recommending certain products.
Reg BI is part of a broader effort by the SEC to enhance investor protection and improve transparency in the securities markets.
Free Consultation with a Securities Attorney
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The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases.
Our firm represents investors in all types of securities related claims, including claims involving stock fraud, broker misrepresentation, churning, unsuitable investments, selling away, and unauthorized trading, among many others.
With over 30 years of securities law experience, The White Law Group has the expertise to help investors defrauded in securities, investment and financial business transactions attempt to recover their investment losses. For more information, please visit our website, www.whitesecuritieslaw.com.
Tags: Classic Asset Management investment advisor Douglas Schmitz, FINRA attorney, Leveraged ETFs, Reg bi, securities fraud attorney Last modified: May 5, 2023