The Securities and Exchange Commission has charged a South Carolina financial advisor with breaching his fiduciary duty by steering mostly elderly clients into leveraged and inverse exchange-traded funds and holding them for years.
His former firm, United Planners’ Financial Services of America, agreed to pay $600,000 to settle related charges.
The SEC's complaint against Cary Edward Urich, a 58-year-old investment adviser representative from Greer, S.C., alleged that from April 2020 to November 2023, Urich used discretionary authority over 54 client accounts to concentrate their savings and retirement money in five leveraged and inverse ETFs. He held the funds for an average of 798 days, although they are designed to hit their targets over a single day.
Leveraged and inverse ETFs are two specific types of complex products that offer retail traders a way to make high-octane bets on investment themes, sectors, or even specific stocks using derivatives.
While ETF issuers tout their ability to help investors profit from booming trends and high-conviction trades, regulators have long warned about the risks to retail investors, particularly from advisors who recommend the products without fully understanding or explaining them.
Urich's clients, who were 71 years old on average in 2020, lost approximately 70% of the money invested in the funds, the SEC said. While Urich's clients had initialed a firm acknowledging that leveraged ETFs might be used, the SEC said they weren't told the funds would be held far beyond the recommended period.
Without admitting the allegations, Urich agreed to a final judgment, pending court approval, that includes a two-year bar from associating with an investment adviser firm and a $100,000 civil penalty.
Four of the funds – SDS, DXD, TWM and QID – sought twice the inverse daily return of the S&P 500, Dow Jones Industrial Average, Russell 2000 and Nasdaq-100. The fifth, UVXY, targeted 1.5 times the daily move of a short-term VIX futures index. According to the complaint, the five made up 72% of the value of Urich’s managed accounts at the end of 2020.
None of the clients had picked “speculation” as an objective, the SEC said, noting that all but one described their risk tolerance as moderate or moderately aggressive.
One client, a 93-year-old retiree identified as E.P., had approximately $1.25 million placed in the funds, and subsequently lost an estimated $746,000. In the case of another 81-year-old client identified as C.E., Urich had him invested in all five of the inverse and leveraged ETFs. The ETFs comprised 107% of the total market value of the client's accounts by the end of 2022, which the SEC said was due to a negative cash balance.
"Urich had C.E.’s accounts invest approximately $462,000 into these leveraged and/or inverse ETFs, and the accounts subsequently realized losses of approximately $310,000 (67%) on those investments during the Relevant Period," the SEC's complaint read.
In a related administrative order against United Planners, the SEC said the supervisors and compliance staff at the Scottsdale, Ariz.-based dual registrant already saw red flags in March 2020, when they discussed the concentrations of assets clients had in the funds. While they weighed placing limits on the allocations, the firm ultimately took no action, and Urich's first-line supervisor reportedly had no system to monitor concentrations or holding periods.
In June 2022, a client filed an arbitration claim against United Planners and Urich asserting that they had been placed in unsuitable leveraged and inverse ETF investments. That prompted the firm to put together an investigative committee that, by November 2022, concluded that the funds were unsuitable.
"[T]he committee concluded that the leveraged and/or inverse ETFs were unsuitable for the Impacted Clients given their advanced ages, risk tolerances, and the high concentrations and long holding periods," the SEC said in its order against the firm. "Accordingly, United Planners restricted Urich from purchasing leveraged and/or inverse ETFs for his clients."
However, the committee did not require Urich to sell existing positions of the products, and some clients held them until at least November 2023.
Apart from the $600,000 fine, United Planners accepted a censure as well as an order to cease and desist from violating Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-7.
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