Joint Statement relating to In the Matter of Classic Asset Management, LLC
May 5, 2023
Yesterday the Commission announced a settled action in the matter of Classic Asset Management, LLC, et al.[1] This investment adviser and its representative violated their fiduciary duties of care to hundreds of clients with respect to investments made in complex products known as leveraged exchange-traded funds. Investors experienced substantial losses.
This misconduct serves as an important reminder that complex exchange-traded products pose complex risks. When investment professionals do not understand those risks or do not heed warnings in disclosure documents accompanying these products, investors lose. Previous Commissions have been highlighting these investor protection issues for some time now.[2] Investment advisers and broker-dealers that recommend these products must ensure that they are in the client’s or customer’s best interest. Complex products, such as leveraged or inverse products that are designed primarily as short-term trading tools for sophisticated investors are unlikely to be in the best interest of a retail investor absent an identified, short-term, investor-specific trading objective.[3]
[1] Matter of Classic Asset Management, LLC, Sec. Exch. Act Rel. No. 97427 (May 4, 2023).
[2] See generally Commissioner Caroline A. Crenshaw and Allison Herren Lee, Statement on Complex Exchange-Traded Products (Oct. 4, 2021); Commissioner Caroline A. Crenshaw, Statement on Single Stock ETFs (July 11, 2022).
[3] See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA-5248 (June 5, 2019) at n.39 and accompanying text; see also Regulation Best Interest: The Broker-Dealer Standard of Conduct, Release No. 34-86031 (June 5, 2019) at nn.593–597 and accompanying text; Staff Bulletin: Standards of Conduct for Broker-Dealers and Investment Advisers Care Obligations (Apr. 20, 2023) at Question 18 (“Certain products are more complex or have additional risk features, which may make it more difficult for firms and their financial professionals to develop an understanding of the terms, features, and risks of those products in order to have a reasonable basis to believe that the products are in the best interest of retail investors.”); Updated Investor Bulletin: Leveraged and Inverse ETFs (Feb. 23, 2023) (discussing extra risks posed by leveraged and inverse ETFs to buy-and-hold investors).