The Securities and Exchange Commission announced charges against Classic Asset Management LLC and Douglas G. Schmitz, an indirect part-owner and investment adviser representative, for breach of fiduciary duty by utilizing leveraged exchange-traded funds in client accounts.
From 2017 to December 2020, Classic Asset Management and Schmitz reportedly invested client funds in leveraged exchange-traded funds for extended periods, despite the funds' prospectus warnings about unique risks and short-term holding recommendations, according to a May 4 news release. Classic Asset Management and Schmitz are said to have lacked understanding of these characteristics and failed to monitor the products' performance.
"Investment advisers have fiduciary duties to act in their clients’ best interest, and this is particularly important when investing clients in complex products such as leveraged exchange-traded funds," Director of the SEC Denver Regional Office Jason J. Burt said in the release. "Complex products present unique risks, and investment advisers must ensure there is a reasonable basis to recommend these products before purchasing them for clients."
Classic Asset Management and Schmitz are alleged to have failed to evaluate if the leveraged exchange-traded funds "were in their clients' best interests throughout the holding period," according to the release. Classic Asset Management is reported to have failed to adopt and implement policies intended to prevent Advisers Act violations.
The SEC's order found Classic Asset Management and Schmitz violated the Investment Advisers Act of 1940 and violated compliance provisions, the release reported.
Without admitting or denying the findings, Classic Asset Management and Schmitz agreed to a cease-and-desist order and censures, according to the release. They will pay disgorgement, prejudgment interest and civil penalties amounting to $195,228 and $738,113, respectively. Classic Asset Management will also administer a distribution as part of the settlement.
The SEC's investigation was conducted by Jeffrey D. Felder and supervised by Kimberly L. Frederick, Nicholas P. Heinke and Burt, the release said. Other individuals from the Enforcement Division's Office of Investigative and Market Analytics and the Denver Regional Office provided assistance.
