Galvin Accuses RIA of Failing To Supervise Risky ETF Recommendations

Massachusetts Commonwealth Secretary William Galvin has fined an SEC-registered investment advisory firm for failing to supervise an advisor who made risky recommendations for an inverse leveraged exchange-traded fund.

New Harbor Financial Group was previously based in Leominister, Mass. and is currently located in Worcester. The group was formed by a trio of advisors who met at UBS and founded the firm in 2005 (it has been registered with the SEC since 2010). 

The firm agreed to settle charges and pay a $100,000 fine, without admitting or denying the allegations and is also offering restitution to affected investors, according to Galvin’s office. The order comes several months after Galvin targeted a number of broker/dealers in a sweep investigating purportedly risky distributions of single-stock ETFs.

According to the consent order against New Harbor, 46 investors were placed in the ProShares UltraShort Russell2000 (TWM), an inverse leveraged ETF with a strategy of purchasing and holding the fund in client accounts “intended as hedges against certain equity positions.” But the TWM prospectus clarified that the fund “may not be suitable for all investors,” should “only be used by knowledgeable investors,” and doesn’t “seek to achieve its stated investment objectives over a period of time greater than a single day.”

The prospectus encouraged investors to monitor their investments frequently, even daily, as the fund’s setup meant that investors could face twice the amount of daily losses compared to an unleveraged ETF. But William Raymond Cole, an advisor and co-founder of the firm, made recommendations for TWM and held them for his clients for periods stretching from weeks to months, and the firm wasn’t able to provide evidence that Cole was frequently checking their status as urged by the prospectus.

“In particular, New Harbor failed to maintain written supervisory procedures to enforce a supervisory system reasonably designed to document the frequency of monitoring investments in TWM by its investment advisor representatives,” the order read.

In August, Galvin announced an investigative sweep into b/ds that distributed single-stock ETFs to retail investors in the state, sending letters of inquiry to Foreside Fund Services, IMST Distributors, ALPS Distributors and Quasar Distributors, all of which are fund distribution platforms registered as b/ds. Much like inverse leveraged ETFs, single-stock funds are not supposed to be used as long-term investments.