The Investment Industry Regulatory Organization of Canada (IIROC) has launched disciplinary proceedings against an advisor who recommended clients buy leveraged inverse exchange traded funds (LETFs) that were too aggressive for their stated risk tolerance.
In its notice of hearing, IIROC alleges that while he was an advisor with Lakeshore Securities in Oakville, Ontario, Kim Husebye failed to exercise due diligence when he recommended that three of his clients buy shares in LETFs. Although the clients indicated that they were mostly interested in moderate-risk investments, income-producing securities, and long-term capital appreciation, IIROC says that Husebye placed a significant portion of their funds into LETFs – even though the prospectuses described them as “aggressive” and “speculative” investments, and cautioned that they may involve a “high degree of risk”.
Specifically, IIROC claims that in November 2009 Husebye purchased shares of the ProShares UltraShort QQQ, the ProShares UltraShort S&P 500, and the Horizons BetaPro US Dollar Bull funds for his clients, the logic being that the ProShares Funds would appreciate if there was a downturn in the equity markets and that the Horizons fund would appreciate if there was a downturn in the value of the Canadian dollar.
However, between December 2009 and December 2010 the value of the clients’ portfolios declined significantly; two clients saw their accounts decline by more than $130,000, which represented a loss of more than 28% of their total investments, while the third client experienced a decline of more than $20,000, representing a loss of more than 34%.
IIROC alleges that, despite the their lack of investment knowledge and their unwillingness to accept significant risk in their accounts, Husebye still went ahead purchased high-risk LETFs for these clients. "He further compounded this risk by remaining invested in the LETFs for a significant period of time, despite clear disclosure that the performance of these securities could differ in amount and direction from the underlying index if held over periods longer than one day," reads the IIROC notice.
None of these allegations have been proven, and a disciplinary hearing is scheduled to take place in Toronto in January. IIROC also notes that Husebye is no longer registered in the securities industry.