We have all done it at least once. Distracted by the game on TV or some urgent phone call, we forget our dinner baking in the oven. Hours later, we come to our senses and discover a charred mess stinking up the kitchen. What should have been a quick bake in the oven was neglected and forgotten, destroying dinner and threatening to burn down the house. It is one thing to ruin dinner; it is entirely another to let distraction and neglect ruin your clients’ accounts. This situation is what Lowell & Company, Inc., a Lubbock-based Investment Adviser, would learn the hard way.
“It is one thing to ruin dinner; it is entirely another to let distraction and neglect ruin your clients’ accounts.”
Recipe for Trading ETFs: One Adviser Ignores Instructions
Jody Bowers, a representative of Lowell & Company, traded exclusively in leveraged ETFs. Leveraged ETFs use financial derivatives and debt to amplify the returns on an underlying index. They are used to speculate on an index or take advantage of the index’s short-term momentum; the key here is “short-term.” Leveraged ETFs are typically held for a few days or less. The ETF Bowers purchased for her clients, Proshares Ultra VIX Short-Term Futures ETF (“UVXY”), included a prospectus which stated, “intended for short-term use; investors should actively manage and monitor their investments, as frequently as daily.” As you can probably guess, that is not what happened.
“Having appropriate supervisory procedures is useless if the Adviser fails to implement them.”
Bowers ignored the warnings contained in the UVXY Prospectus for two clients, for which she had discretionary authority. For one client, she purchased 2,000 shares of UVXY and held the position for 356 days. For another client, she held 11,000 shares of the leveraged ETF for 987 days! By the end of it, the first client has lost 98% of their initial investments, and the second lost 93%. That house burned down. But why?
Follow the Recipe: Procedures and Implementation
It is clear that Bowers neglected the accounts, but Lowell & Company’s failure to supervise representatives created a systemic problem within the firm, allowing for such a disaster to occur. Lowell & Company had written supervisory procedures that could have prevented this situation, but they failed to implement them. Their processes required all discretionary orders to be approved by a designated supervisor and then required a supervisor to review the monthly statements for all discretionary accounts. This monthly review never occurred, allowing Bowers’ negligent handling of the UVXY shares to continue, unsupervised.
“…Lowell & Company was reprimanded and ordered to pay a $40,000 fine pursuant to § 23-1 of the Texas Securities Act.”
Having appropriate supervisory procedures is useless if the Adviser fails to implement them. Lowell & Company’s failure to supervise their representatives cost them dearly and constituted a violation of §116.10 of the Rules and Regulations of the Texas State Securities Board. On August 2nd, Lowell & Company was reprimanded and ordered to pay a $40,000 fine pursuant to § 23-1 of the Texas Securities Act.
A Trained Chef In the Kitchen: Experts in Procedures Can Help
As an RIA, not only do you have a duty to establish supervisory procedures, but you must maintain and enforce them as well. You cannot let the house burn down when it comes to your clients unless you want to pay for the consequences. If you need help establishing the appropriate supervisory procedures, you can contact Red Oak today.
About Red Oak Compliance Solutions
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