Advisor Breaches Duty to Client

Traditionally investment advisers have been recognized as having a fiduciary duty to their clients. Once clear area of application is when the market professional recommends investments. The adviser, under those circumstances, has a clear duty to make sure he or she fully understands the product and has made a determination that it is suitable for the client. Unfortunately that is not always the case as the Commission’s most recent action in this area demonstrates, In the Matter of Classic Asset Management LLC, Adm. Proc. File No. 3-21403 May 4, 2023).

Classic Asset Management is an action which names as Respondents the firm, a registered investment adviser, and a partial Owner of the firm. The Order centers on the acquisition of leveraged exchange traded funds for extended periods. Respondents purchased and held the Funds for clients, frequently for extended periods.

Those acts were inconsistent with the prospectus for the Funds. It stated that the products have unique risks and were designed to be held for no longer than a single day. Despite the warning Respondents failed to appropriately monitor the investments. The products were acquired by clients of the adviser and frequently held for long periods. It was thus clear that the adviser failed to properly evaluate the product in view of the investment criteria and needs of the client. Stated differently, no proper evaluation of the best interests of the clients was made prior to the investment recommendation.

The advisory firm also failed to adopt and implement policies and procedures reasonably designed to prevent violations of the Advisers Act. Respondents did undertake remedial efforts. To resolve the matter Respondents consented to the entry of a cease-and-desist orders based on Advisers Act Section 206(2) and a censure. The firm also consented to the entry of a cease-and-desist order based on Section 206(4) and Rule 206(4)-7. The advisory firm will pay disgorgement of $81,824, prejudgment interest of $13,404 and a civil penalty of $100,000. Mr. Schmitz will pay disgorgement of $523,086, prejudgment interest of $115,027 and a penalty of $100,000.

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