In an apparent departure from the previous administation, the Securities and Exchange Commission has approved a pair of quadruple-leveraged exchange-traded funds from Exchange Traded Managers Group.
ForceShares Daily 4X US Market Futures Long Fund (UP), and ForceShares Daily 4X US Market Futures Short Fund (DOWN) will deliver 400% of the daily performance of Standard & Poor’s 500 stock index futures.
The SEC’s approval could mark a departure from the previous administration’s feelings about highly leveraged funds. Former SEC Chair Mary Jo White announced in May that the government was looking at regulations to curb triple-leveraged funds.
The fund is an unsual offering: It’s registered under the Securities Act of 1933, rather than the Investment Company Act of 1940. From the fund’s S-1 filing: “The Sponsor will endeavor to manage each Fund so that it will not be subject to registration under the 1940 Act. This requires monitoring the proportion of each Fund’s assets to be placed in various investments. For example, a Fund will not invest, in the aggregate, more than twenty percent (20%) of its assets in Other S&P Interests or Stop Options that constitute securities for the purposes of the 1940 Act.”
In addition, the ForceShares funds were created as an “emerging growth company” as defined under the Jumpstart Our Business Startups Act (the “JOBS Act”) — an unusual route. “I don’t know what the prior administration had in mind with the JOBS Act, but I don’t think it was quadruple leveraged ETFs,” said Ben Johnson, director of global ETF research for Morningstar.
And among the many warnings in the fund’s S-1 filings: The Trust is an “emerging growth company,” as defined in the JOBS Act, and may therefore take advantage of certain exemptions from various reporting requirements that are applicable to other public companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of Sarbanes Oxley, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. There can be no assurance that investors will not find the Funds’ Shares less attractive due to reliance on these exemptions. If some investors find a Fund’s Shares less attractive as a result, there may be a less active trading market for such Shares and the price of such Shares may be more volatile.”
The filing is filled with other interesting details, according to zerohedge.com:
• The sponsor has no experience operating commodity pools
• The sponsor is “leanly staffed” and “relies heavily on key personnel to manage trading activities”
• The sponsor may have conflicts of interest, which may cause them to favor their own interests to your detriment…the sponsor’s principals, officers or employees may trade futures and related contracts for their own accounts.
• The sponsor has limited capital and may be unable to continue to manage the funds if it sustains continued losses
• The funds are not registered investment companies, so investors don’t have have the protections of the 1940 Act.
The SEC was leery of triple-leveraged funds because of their danger to unwary investors. These funds won’t do much to alleviate that. In theory, the funds could transform a 1%, one-day gain into a 4% gain or loss.
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