In what Massachusetts Secretary of State William F. Galvin said is his “continued focus” on complex and risky products being peddled to Main Street investors, his securities division levied a $100,000 fine on SEC-registered investment advisor (RIA) New Harbor Financial Group for failure to supervise the sale of inverse leveraged exchange-traded funds.
The Worcester, Mass.-based RIA, which manages assets of $334 Million for 1,449 client accounts, agreed to settle without admitting or denying the charges. New Harbor didn’t immediately return a request for comment.
According to the Massachusetts consent order, from August 1, 2016 to July 31, 2018, New Harbor failed to supervise an investment advisor rep who invested the funds of at least 46 investors in an “unsuitable” inverse leveraged exchange-traded fund.”
The inverse leveraged ETF the former New Harbor IA rep used is the TWM UltraShort Russell 2000 ETF from ProShares, which was designed to perform as the inverse to the Russell 2000 and seeks a return that is -2x the return of its benchmark for a single day.
While the prospectus for TWM advises active daily monitoring of the investments, a former New Harbor representative purchased and held inverse leveraged ETFs for his clients for periods of several weeks to several months.
“Investors should monitor their holdings as frequently as daily,” the TWM prospectus states. “Due to the compounding of daily returns, holding periods of greater than one day can result in returns that are significantly different than the target returns.”
New Harbor was unable to provide any records to regulators that would indicate that their representative monitored the performance of the client accounts on a daily basis, as recommended, Massachusetts said in the order.
“The use of leveraged, and especially inverse leveraged ETFs, comes with heightened risks for investors. Those risks were magnified by New Harbor’s failure to document frequent monitoring of the accounts of TWM clients,” the securities division said in statement.
“Leveraged, inverse ETFs have been a problem for investors for a long time. I’m surprised any firms still allow them to be sold and held,” Adam Gana, Managing Partner at Gana Law Firm told Financial Advisor Magazine.
“These products are used as a hedge by doomsday brokers who don’t fully understand the risks and make long-term bets against the stock market, which is traditionally a horrific bet unless you time the market right,” added Gana.