SEC BRINGS ACTION AGAINST ADVISORY FIRM FOR BREACH OF FIDUCIARY DUTIES IN USE OF LEVERAGED ETFs

  Taking the Series 66 Exam? Are you familiar with NASAA's Test Specifications for the Series 66 Exam? If yes, then you know that these Test Specifications list topics that will appear on the Series 66 Exam one way or other. Specifically for this blog, I refer to Series 66 Test Specifications Section II(E)(2-3) which refer to Recommendation of Leveraged and Inverse ETFs.

Just recently, on May 4, 2023, the SEC issued a Cease-and-Desist Order, File No. 3-21403, dealing with an investment advisory firm, Classic Asset Management LLC (CAM). Why? For Breach of Fiduciary Duty in Connection with Use of Leveraged ETFs.

Here's what the SEC said in its Press Release 2023-88 on this matter:

According to the SEC’s order, from at least 2017 through December 2020, CAM and Schmitz [an investment adviser representative] invested advisory clients in leveraged ETFs for extended periods of time, often in significant concentrations, despite warnings in the funds’ prospectuses that the products carried unique risks, were designed to be held for no more than a single trading day, and required frequent monitoring. The order finds that CAM and Schmitz misunderstood these fundamental characteristics of the leveraged ETFs and thus lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests. Further, according to the order, CAM and Schmitz failed to appropriately monitor the performance of these products and, consequently, did not evaluate whether the leveraged ETFs were in their clients’ best interests throughout the holding period. The order also finds that CAM failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act.

Note that the above paragraph states that "CAM and Schmitz misunderstood these fundamental characteristics of the leveraged ETFs and thus lacked a reasonable belief that the leveraged ETFs were in their clients’ best interests."

Here is the link to NASAA's Test Specifications for the Series 66 Exam. See the references to Breach of Fiduciary Duty in Connection with Use of Leveraged ETFs  in NASAA's Series 66 Test Specifications, Section II(E)(2-3).

Study for the Series 66 Exam is available from Amazon in both paperback and Kindle e-book versions. Here is the link to Bob Eder's book on Amazon.

For questions about Bob Eder's Series 66 manual, Study for the Series 66 Exam, or questions in general about the Series 66 Exam, or about  Breach of Fiduciary Duty in Connection with Use of Leveraged ETFs, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law, in 2001. See Bob Eder's Author Page on Amazon.com.