8-K: ProShares Trust II Identifies Accounting Errors, Restates Prior Financials

ProShares Trust II has identified errors in the classification of futures contract balances, leading to a restatement of previously issued financial statements and a conclusion that internal controls were ineffective.

Summary

• ProShares Trust II discovered errors in how it classified balances related to futures contracts with its Futures Commission Merchant (FCM).
• The errors affected several funds, including ProShares Short VIX Short-Term Futures ETF, ProShares Ultra Bloomberg Natural Gas ETF, ProShares Ultra VIX Short-Term Futures ETF, ProShares UltraShort Bloomberg Natural Gas ETF and ProShares VIX Short-Term Futures ETF.
• The misclassification resulted in an understatement of segregated cash balances and an overstatement or understatement of receivables/payables on open futures contracts.
• These errors impacted the Statements of Financial Condition and Cash Flows, specifically affecting line items such as segregated cash balances, receivables/payables, and cash flow activities.
• The errors did not affect the funds' performance, investment results, net asset values, income, or distributions.
• As a result, the company will restate its audited financial statements for 2021, 2022, and 2023, and unaudited interim financial statements for periods ended September 30, 2023, March 31, 2023 and 2024, and June 30, 2023 and 2024.
• Management concluded that a material weakness existed in internal controls related to the classification of FCM accounts as of December 31, 2023, March 31, 2024, June 30, 2024 and September 30, 2024.
• The company's internal control over financial reporting and disclosure controls were deemed ineffective as of December 31, 2023, March 31, 2024 and June 30, 2024.
• Amendments to the original 10-K and 10-Q filings will be made to correct the errors, and the threeand nine-month periods ended September 30, 2023 will be corrected in the Form 10-Q for the quarter ended September 30, 2024.

Sentiment

Score: 3

Explanation: The document reveals significant accounting errors and internal control weaknesses, which are negative for investor confidence. While the errors did not impact fund performance, the need for restatements and the identification of material weaknesses are concerning.

Positives

• The errors did not impact the funds' performance, investment results, net asset values, income, or distributions.
• The company is taking steps to correct the errors by restating the affected financial statements and amending the relevant filings.

Negatives

• The misclassification of balances resulted in an understatement of segregated cash balances and an overstatement or understatement of receivables/payables on open futures contracts.
• The company identified a material weakness in internal controls related to the classification of FCM accounts.
• The company's internal control over financial reporting and disclosure controls were deemed ineffective as of December 31, 2023, March 31, 2024 and June 30, 2024.
• Previously issued financial statements for 2021, 2022, 2023 and interim periods in 2023 and 2024 should no longer be relied upon.

Risks

• The restatement of financial statements could lead to a loss of investor confidence.
• The identified material weakness in internal controls could indicate broader issues with the company's financial reporting processes.
• The company may face increased scrutiny from regulators and investors due to the accounting errors and control deficiencies.

Future Outlook

The company intends to file amendments to correct the errors in the affected financial statements as soon as practicable.

Management Comments

• Management of ProShares Trust II identified errors in the classification of balances relating to futures contracts.
• Management concluded that a material weakness existed with respect to controls related to the classification of the FCM accounts.
• Management has discussed the matters disclosed with the company's independent registered public accounting firm, PwC.

Industry Context

This announcement highlights the importance of accurate financial reporting and robust internal controls in the investment management industry, particularly for funds dealing with complex financial instruments like futures contracts. It underscores the need for fund administrators to correctly interpret and classify financial data from FCMs.

Comparison to Industry Standards

• The misclassification of futures contract balances is a significant error that deviates from industry best practices for financial reporting.
• Other investment management firms, such as BlackRock and Vanguard, typically have robust internal controls and procedures to prevent such errors.
• The identification of a material weakness in internal controls is a serious concern that requires immediate remediation to meet industry standards.
• The restatement of multiple years of financial statements is unusual and indicates a significant lapse in the company's financial reporting processes compared to industry norms.

Stakeholder Impact

• Shareholders may experience a loss of confidence due to the restatement of financial statements and the identified internal control weaknesses.
• Employees involved in financial reporting may face increased scrutiny and workload during the remediation process.
• Customers of the affected funds may be concerned about the accuracy of the financial information provided by the company.
• Creditors may reassess their risk exposure to the company due to the identified financial reporting issues.

Next Steps

• The company will file amendments to the original 10-K and 10-Q filings to correct the errors.
• The company will correct the affected line items for the threeand nine-month periods ended September 30, 2023 in its Form 10-Q for the quarterly period ended September 30, 2024.
• The company will implement a remediation plan to address the material weakness in internal controls.

Key Dates

Keywords

financial restatement, internal controls, futures contracts, accounting errors, material weakness, ProShares Trust II, financial reporting, FCM, segregated cash, disclosure controls