Adviser Fined for Breach of Fiduciary Duty Related to Leveraged ETF Investments

An investment adviser settled charges with the SEC for breach of fiduciary duty after failing to properly evaluate whether leveraged exchange traded funds ("LETFs") were in the best interests of its clients.

In the Order, the SEC found that the adviser and its registered representative invested clients in certain LETFs for extended periods of time in "significant concentrations" despite disclosures in the LETFs' prospectuses that the products (i) carried unique risk and (ii) were only meant to be held for a single trading day at maximum. The SEC said that the adviser did not review the LETFs as needed even though the LETFs' offering documents stated that the products required "frequent monitoring." As a result, the SEC found that the investment adviser violated Advisers Act Sections 206(2) and (4) ("Prohibited transactions by investment advisers") as well as Rule 206(4)-7 ("Compliance procedures and practices").

To settle the charges, the investment adviser and its representative agreed to (i) cease and desist from further regulatory violations, (ii) a censure and (iii) pay disgorgements of $81,824 and $523,086, prejudgment interest of $13,404 and $115,027, and civil monetary penalties of $100,000 and $100,000, respectively.