Articles Tagged with Exchange Traded Funds

Non-Traditional Exchange-Traded Funds Are Not Suitable For Every Investor

Our securities fraud attorneys at Shepherd Smith Edwards and Kantas (SSEK Law Firm) are looking into complaints by investors whose brokers may have inappropriately recommended that they invest in non-traditional exchange-traded funds (ETFs). 

These types of ETFs are leveraged, inverse and inverse-leveraged exchange-traded funds and they are not for every investor. This is definitely the type of investment that a financial representative and its broker-dealer should assess for suitability on a customer-by-customer basis. 

Kalos Capital Broker Sold GPB Private Placements and LIETFs 

Shepherd Smith Edwards and Kantas, LLP (SSEK Law Firm) is investigating customer complaints involving Darren Michael Kubiak, a Kalos Capital broker who is currently suspended from the industry for three months. Kubiak is one of the Kalos representatives who sold GPB Capital Holdings private placements to investors. GPB is accused of operating a $1.8B Ponzi scam. 

Kubiak Suspended By FINRA 

Shepherd, Smith, Edwards & Kantas (“SSEK”), a law firm specializing in representing wronged investors, is looking into allegations against Financial West Group and its broker Daniel Gordon Maughan.

It is alleged that Maughan excessively traded and churned a client’s Trust Account at his member firm. A arbitration complaint has already been filed!  According to his brokercheck, Maughan has also been banned by The Financial Industry Regulatory Authority Inc. (FINRA).

The complaint alleges that by churning the customer’s trust account, Maughan willfully:

F-Squared Investments Inc. has consented to pay $35M to settle Securities and Exchange Commission charges accusing the firm of making false claims regarding the performance of a key investment product. F-Squared admitted that it misled clients for several years about its AlphaSector strategy.

F-Squared is the largest marketer of index products that use Exchange-Traded Funds. The SEC claims that F-Squared falsely advertised that the AlphaSector investment strategy had a successful track record that was based on actual investment performance for real clients when, in fact, the algorithm touted didn’t even exist during the noted time period.

The algorithm was the basis of signals sent from a third party data provider indicating when to sell or buy an investment. F-Squared and Howard Present, its co-founder and ex-CEO, used the signals to develop the AlphaSector, a model portfolio of sector ETFs that could be rebalanced from time to time when the signals changed. After its launch in 2008, AlphaSector’s indexes became the company’s largest revenue source.

The Securities and Exchange Commission is looking at whether Pacific Investment Management Co, artificially upped the returns of a fund that targeted smaller investors. At issue is the way the $3.6B Pimco Total Return ETF (BOND) purchased investments at a discount but depended on higher valuations for the investments when the fund worked out its holdings’ value soon after. This type of move could make it appear as if the fund made rapid gains when it was actually just availing of the variations in how certain investments are valued.

According to The Wall Street Journal, sources familiar with the probe say that SEC investigators have already interviewed firm owner Bill Gross. The regulator could be looking at whether investors ended up with inaccurate data about the performance of the fund. If so, this could be a breach of securities law, even if the wrongdoing wasn’t intentional.

While the probe has been going on for at least a year, it seems to have recently escalated. Other Pimco executives have also been interviewed.

InvestmentNews is reporting that according to sources in the know, the Securities and Exchange Commission is trying to figure out whether currency traders at the biggest banks fixed benchmark foreign-exchange rates and distorted the process for exchange-traded funds and options. The regulator, which oversees the options and ETFs involved with the rates, joins the ongoing US and European regulatory investigations into possible currency market manipulation. Also probing the matter is the Commodity Futures Trading Commission, the Federal Reserve, the US Justice Department, New York’s lead banking regulator, and the Office of the Comptroller of the Currency.

European and US authorities have talked to at least 12 banks as they look into allegations reported by Bloomberg News last year accusing dealers of saying they shared data about client orders to manipulate currency benchmark spot rates. Options and other derivatives comprise over 50% of the $5.3 trillion/day foreign exchange market, with the remaining consisting of spot transactions.

In London today, with the Bank of England’s governor, Mark J. Carney talked to lawmakers about concerns that banking officials might have known about and tolerated currency market manipulation. Independent directors are currently conducting a review. Carney testified in front of the Treasury Select Committee.

In a recent securities case, manager BlackRock is accused of self-dealing and pilfering from iShares exchange-traded funds’ securities lending revenues. The plaintiffs are pension funds Plumbers and Pipefitters Local No. 572 Pension Fund of Nashville and Laborers’ Local 265 Pension Fund of Cincinnati. They contend that a number of the iShares ETFs put money towards compensation that was “grossly excessive” to pay agents, including those with affiliations to the funds. iShares Chairman Michael Latham and BlackRock President Robert Kapito are also defendants.

The plaintiffs contend that BlackRock’s iShares ETFs violated fiduciary duties and created an fee structure was excessive in order to avail of returns from securities lending that should have been paid to investors. They believe that iShares ETFs and officials at Blackrock perpetuated a scam that allowed them to get their hands on at minimum 40% of revenues from securities lending at cost to investors.

However, BlackRock, which is the largest ETF manager, is arguing that the securities case is without merit. The company claims that its program for securities lending has generated returns that exceed the average to ETF shareholders and it believes that its lending policies shouldn’t be compared with others in its field. BlackRock has pointed out that while it has profited from the program, investors do get their high returns “over time.” It intends to fight the ETF lawsuit.

According to Securities and Exchange Commission Division of Investment Management Director Norm Champ, consideration is being given toward how the 1940 Investment Advisers Act might be applicable to private fund advisors. Champ spoke at an American Law Institute-Continuing Legal Education Group in New York earlier this month.

One reason for this closer scrutiny is that because of the Dodd-Frank Act, advisers to certain private funds that previously didn’t have to must now register with the SEC. Currently, about 40% of SEC-registered advisors work with private funds. Hence, noted Champ, the need to view our regulatory framework from a wider perspective and “how that fits” with these advisors.

It was just recently that the division began taking a more risk-based approach toward how it determines which regulator initiatives are priority. This means that before starting a project, the way it might impact capital formation, investors, regulated entities, and the needed resources are taken into consideration. Champ said that the issue of whether/not to apply the Investment Advisers Act to private fund advisers is up for consideration as a priority. (He made clear that the remarks he made at the event are his own and don’t necessarily reflect that of his employer.)

Champ also discussed exchange-traded funds and how his division will no longer delay considering exemptive relief for ETF funds that invest a lot in derivatives. (Such requests had been placed on hold by the SEC in 2010 while it reviewed how these funds used the derivatives.)

Exchange traded funds (ETFS) are investment companies that can be legally classified as Unit Investment Trusts and open-end companies but are different from these two in that ETFs don’t sell individual shares straight to investors and instead issue shares in “Creation Units,” which are big blocks. Typically, it is institutions that buy these blocks.

That said, any relief request for ETF funds has to come with “two specific representations,” noted Champ: A) An ETF has to attest that the board will review and approve not just the derivatives investment of the funds but the way that the ETF’s investment manager handles risk related to derivatives and B) AN ETF has to represent that its derivative investments-related disclosures in periodic reports and offering documents are in line with staff and commission guidance. Champ acknowledged that there were still some concerns about leveraged ETFs and that the commission would not “support new exemptive relief” for the funds.

Leveraged ETFs, also called ultra short funds, try to deliver multiples of the performance of the benchmark or index they are tracking. They look to reach a return that is a multiple of the inverse performance of the index that is underlying.

Exchange-Traded Funds (ETFs), SEC

SEC’s IM Division Eyeing Application Of Advisers Act to Private Fund Advisers, BNA/Bloomberg, December 7, 2012

Investment Advisers Act of 1940 (PDF)

More Blog Posts:
Holding Brokers to Investment Adviser Accountability Standards is a Bad Idea, Say Some Wall Street Executives, Stockbroker Fraud Blog, July 16, 2011

Morgan Keegan Founder Faces SEC Charges Over Mortgage-Backed Securities Asset Pricing in Mutual Funds, Institutional Investor Securities Blog, December 17, 2012

LIBOR Investigation Leads to Three Arrests, Institutional Investor Securities Blog, December 11, 2012

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