Articles Posted in Exchange Traded Funds

Asset Manager Accused of Operating ETF Without Necessary Exemption

The US Securities and Exchange Commission said that BlackRock Fund Advisors (BLK) will pay $1.5M to resolve charges accusing the asset manager of advising an exchange-traded fund to violate the Investment Company Act. BlackRock ran the Russia Fund ETF with out the necessary exemptive order from 12/2010 to 1/2015. The exemptive order is necessary because there are some ETF traits that would cause the fund and dealers to violate the Act were it not for having an order.

According to the Commission, BlackRock was notified in 2011 that the exemptive relief that had been issued to other investment companies that it advised could not be applied to funds that were organized separately. Despite knowing this, BlackRock is said to have kept running the ETF without the necessary exemption. It wasn’t until 2015 when, after more talks with the SEC, that the asset manager merged the Russia Fund ETF with another investment company that it advised. It could then apply another acquired exemptive relief to the Russia Fund ETF.

Ex-Investment Adviser Loses Arbitration Claim Over Gold Exchange-Traded Fund
Ex-financial adviser Dawn Bennett is on the losing end of a $1M securities arbitration claim brought by a former client who claims that she recommended he invest in a gold exchange-traded fund. Steven Santagati brought his ETF securities case to the Financial Industry Regulatory Authority. He alleged failure to supervise, breach of fiduciary duty, and negligence.

InvestmentNews reports that in an interview this week, Santagati accused Bennett of taking advantage of his lack of understanding about “financial details.” Santagati said that Bennett leveraged his account and invested in risky investments, including the SPDR Gold Shares exchange traded fund.

Finra awarded Santagati $746K. Western International Securities, which was Bennett’s ex-brokerage firm, and her Bennett Group Financial Services are additional respondents in this case. They were found “jointly and severally” liable for the violations. In addition to Santagati’s award, they must pay $27K in expert witness fees and $252K in legal fees.

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The US Securities and Exchange Commission is expected to charge Navellier & Associates with fraud. The registered investment advisor, in a Form ADV brochure filing, disclosed that the regulator’s enforcement staff had preliminarily determined to recommend that the SEC file a case.

The Commission has been investigating advisory firms that marketed F-Squared Investments-related exchange-traded fund investment strategies. F-Squared Investments admitted that some of its marketing strategy performance records were inflated.

Last year, at least 13 brokerage firms and RIAs settled with the SEC for including the Boston-based firm’s claims in their own marketing collateral, including that the AlphaSector ETF strategy had been out-performing the S & P 500 for a number of years. F-Squared promoted the strategy as utilizing an algorithm that could indicate when it was time to sell.

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Morgan Stanley Smith Barney (MS) has consented to pay a penalty of $8M to resolve Securities and Exchange Commission charges accusing the firm of wrongdoing involving single inverse exchange-traded fund investments. Morgan Stanley admitted wrongdoing as part of the settlement.

According to the SEC’s order, Morgan Stanley failed to adequately put into place procedures an policies to make sure that clients comprehended the risks involved in buying inverse ETFs and did not procure signatures from several hundred clients on a client disclosure notice that stated that these ETFs are usually not suitable for investors intending to keep them longer than a trading session unless the securities are part of a hedging or trading strategy.

Morgan Stanley persuaded investors to buy single inverse ETFs in accounts, including retirement accounts. Securities were held-long term. As a result, many of these advisory clients suffered losses.

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A Financial Industry Regulatory Authority Panel is ordering Mid Atlantic Capital Corp. to pay David Wellman and Beverly Bien $922K. The married couple sued the independent brokerage firm for losses they sustained after they invested in Sonoma Ridge Partners (a real estate private placement), KBS-sponsored nontraded REITs, silver and gold exchange-traded funds  (ETFs) like iShares Silver and Market VectorsGold Minors, and Contago Oil and Gas securities. They alleged that Mid Atlantic Capital Corp. was liable for negligent misrepresentation, negligence, omissions, breach of fiduciary duty, breach of contract, negligent supervision, restitution, common law fraud, and violation of Colorado’s Securities Act.

The couple was close to retirement age when they made the investments several years ago prior to the 2008 economic collapse. According to the couple’s legal team, among the issues that they believe were problematic is that Mid Atlantic’s two brokers that managed Sonoma Ridge Partners were not the same brokers who marketed and sold the private placement to investors. The claimants believe that this presented a conflict of interest.

Previously called the Jadda Secured Senior Mortgage Fund,  Sonoma Ridge Partners was promoted as an alternative to low-yielding CD’s, as well as to the stock market with its volatility. It was supposed to render 9-11% annual yields. Also, although Bien bought most of the illiquid real estate investments, she lacked the required net worth necessary to qualify as an accredited investor under private placement industry rules.

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Pacific Investment Management Company (PIMCO) has agreed to settle the U.S. Securities and Exchange Commission’s charges accusing the firm of misleading investors about the performance of one of its exchange-traded funds and not placing an accurate value on certain fund securities. As part of the settlement, PIMCO will pay almost $20M and hire an independent compliance consultant.

The regulator contends that investors were drawn to the Pimco Total Return Active ETF after, within months of its launch in 2012, it did well enough to outperform the investment management firm’s flagship mutual fund. The fund was previously managed by Bill Gross, PIMCO’s co-founder, and it was intended to mirror PIMCO’s flagship Total Return Fund.

Although Pimco Total Return Active ETF’s initial success is linked to the smaller-sized bonds that were purchased to help boost early performance, in its yearly and monthly reports PIMCO purportedly gave investors other reasons for these early results that were “misleading.” Meantime, the SEC said, PIMCO did not disclose that the initial performance success was a result of an “odd lot strategy”—referring to the purchase of the smaller bonds, which were non-agency mortgage-backed securities—and that this approach that would not be sustainable as the fund continued to grow.

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The U.S. Securities and Exchange Commission has imposed penalties against more than a dozen investment advisory firms because they purportedly spread false claims made by F-Squared Investments about its Alpha Sector strategy. The SEC said that the firms violated securities laws.

According to the regulator, which conducted an enforcement sweep, 13 firms accepted y F-Squared’s false claim that its exchange-traded funds’ investing strategy had outperformed the S & P index for a number of years. The firms touted these claims when recommending the investment to their clients. The SEC said that they did this without first obtaining adequate documentation to confirm that what F-Squared had told them was true.

It was in 2014 that F-Squared admitted to wrongdoing and consented to pay $35M to settle allegations accusing it of using false performance information about its key product to bilk investors. The SEC said that F-Squared falsely advertised its supposed successful multi-year performance record. Unfortunately, that supposed time period for this performance record would have taken place before key algorithm that had been touted for this success even existed.

In reality, backtesting had been used to come up with a “hypothetical performance” from the noted period of supposed success. Yet, F-Squared and ex-CEO Howard Present marketed AlphaSector as “not backtested.” Also, the hypothetical information included a performance calculation mistake that increased results by about 350%.

Penalties for the 13 firms vary in amount from $100K to $500K. These were determined according to the fees they respectively made from strategies related to AlphaSector.

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The Financial Industry Regulatory Authority has filed a case against Richard William Lunn Martin, a former broker. According to the self-regulatory organization, from at least 3/11 through 7/15, and while he was a GF Investment services broker, Martin encouraged clients to invest in high-risk non-traditional exchange-traded funds so he could hedge against what he anticipated would be a pending financial crisis. Martin purportedly believed that the financial and monetary system was going to fail. FINRA said that he lost customers $8M as a result of the bad investment advice he gave them.

Because of his fears, said FINRA, Martin recommend that clients put their money in inverse and leveraged funds, which are typically not suitable for retail investors. This is especially true when the market is volatile and the investor intends to hold the funds for longer than one trading session. Examples of recommendations that he made:

· Direxion Daily Gold Miners Bear 2x Shares (DUST)

· Proshares UltraPro Short Russe112000 (SRTY)

· Proshares UltraPro Short QQQ (SQQQ)

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FINRA is fining Oppenheimer & Co. Inc. (OPY) $2.2M for the sale of non-traditional exchange-traded funds, including inverse, leveraged, and inverse-leveraged ETFs, to retail customers without proper supervision and for suggesting them to clients even though they were not appropriate investments for them. The self-regulatory organization is also making the firm pay over $716,000 to the customers who were impacted.

FINRA said that even though Oppenheimer put into place policies barring representatives from both selling non-traditional ETFs to retail customers and executing non-traditional ETF purchases that were unsolicited for said customers unless they met certain requirements—including liquid assets greater than $50OK—the firm did not do a reasonable job of making sure that these policies were properly enforced. (The firm had put them into effect after FINRA issued a notice advising brokerage firms of the risks involved in non-traditional ETFs.) Because of this, Oppenheimer continued to market non-traditional ETFs to retail customers and effect transactions that were unsolicited for those who failed to meet the requirements.

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BNY Mellon to Pay Massachusetts $3M Over Computer Problem That Impacted Mutual Funds

Bank of New York Mellon (BK) will pay $3 million to the state of Massachusetts to resolve a probe that found that a computer glitch did not calculate net asset values for over 1,000 mutual funds. Although the bank hired SunGard InvestOne to calculate these values, there was one-weekend last year when a malfunction occurred.

The Massachusetts Securities Division conducted an investigation and discovered that BNY Mellon lacked a back-up plan to deal with such a malfunction. Because of this, non-uniform and untimely information was sent to clients and funds. As Secretary of the Commonwealth William F. Galvin noted, it is the job of financial institutions like BNY Mellon to oversee third-party vendors and put into place a back-up plan in the event a vendor’s system fails. The bank says that in the wake of the outage, it took action to protect client interests and ensure that the daily net asset values were issued.

BNY Mellon said that it has since made investors and the funds that sustained losses because of the computer error whole. The bank has made changes to supervisory procedures.

WedBush to Pay $675K Fine to Nasdaq and FINRA over Trading and Clearing Errors Involving Exchange-Traded Funds

Wedbush Securities Inc. will pay a $675K fine to the Nasdaq Stock Market and the Financial Industry Regulatory Authority Inc. over clearing and trading mistakes involving redemption and trading activities related to leveraged ETFs. Wedbush served as Scout Trading, LLC’s clearing firm.

According to FINRA, from 1/10 to 2/12, Scout Trading was not long enough in the shares that made up the redemption orders. Scott Trading turned in more than 250 naked redemption orders via Wedbush. These involved nearly a dozen ETFS that totalled over 295 million shares. This activity and ETF short-selling on the second market by Scout Trading led to Wedbush’s failure to deliver on a number of occasions. (This could have led to a naked short sale in which the seller does not arrange to borrow the securities in a manner timely enough for the buyer to receive the delivery within the standard three days.)

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