A North Dakota financial firm and one of its advisers has to pay about $1 million to keep client funds in a complex exchange-traded fund that is not in the client’s best interests.
The Securities and Exchange Commission, which regulates financial planners, announced on thursday Fargo, North Dakota-based Classic Asset Management and its indirect part-owner and investment advisor, Douglas Schmitz, are set to resolve allegations of breach of fiduciary duty in the use of a complex investment vehicle known as leverage. exchange transaction funds agreed to pay $933,341 to Called LETFs for short, these products use borrowed money to amplify the kind of returns you can get from standard exchange-traded funds, which often track stock market indices like the S&P 500.
Funds in which Classic Asset Management and Schmitz invested client money often had prospectuses that said they were not intended to be held for more than one day. According to the documents, maintaining them for long periods of time would be very dangerous and would require close monitoring and control.
Despite the warnings, Classic Asset Management and Schmitz kept the client in the fund for “weeks, months and years.” According to the SEC. Regulators focused specifically on the period from January 2017 to December 2020.
Over the past four years, client funds have been held in LETFs for an average of 331 days. Of his 290 clients Schmitz advised during that period, about 76% were invested in the fund, according to the SEC.
The SEC wrote that “neither[Classic Asset Management]nor Schmitz had reasonable grounds to conclude that LEETFs are suitable for clients generally or in the way they were intended to be used.” .
Chase Carlson, a securities fraud attorney and founder of Miami-based Carlson Law, says many firms simply won’t allow their advisors to invest their clients’ money in LETFs.
“It’s not appropriate for the average investor to have that level of risk,” Carlson said. “This is a focused, leveraged bet, a highly directional bet.
The company’s burden of fines consists of $81,824 in disgorgement, $13,404 in prejudgment interest, and $100,000 in civil penalties. Schmitz must pay $523,086 in disgorgement, $115,027 in prejudgment interest, and $100,000 in civil penalties.
“Investment advisors have a fiduciary duty to act in the best interests of their clients, and this is a direct result of their clients’ exposure to complex products such as leveraged ETFs,” said Jason Bart, director of the SEC’s Denver Regional Office. This is especially important when investing: “Complex products carry inherent risks and investment advisors should ensure that there is a reasonable basis for recommending these products before purchasing them for their clients.” need to do it.”
According to Classic Asset Management Latest Form ADV filed with the SEC As of March 16, the company had $158.4 million in assets under management. He also had 12 full-time and part-time employees.
Schmitz, who also holds a broker’s license, has three customer disputes on the SEC’s list. Investment Advisor Public DatabaseThe first of them settled for $275,000 in April 2020 over alleged failed deals. The second related to allegations that Mr. Schmitz had failed to comply with an order to close his account, which was closed without action in July 2020. And his third, the accusation that Schmitz failed to meet his fiduciary responsibilities, is still pending. The SEC’s database also lists bankruptcies from 2015.
Attempts to contact Class Asset Management and Schmitz were unsuccessful.