10-K/A: ProShares Trust II Amends 10-K Filing Following Financial Statement Reclassifications

ProShares Trust II has amended its annual report on Form 10-K to correct classification errors in its financial statements related to futures contracts, with no impact on net asset value or shareholder equity.

Summary

• ProShares Trust II has filed an amended 10-K report to correct errors in the classification of certain financial statement items.
• The errors involved the misclassification of segregated cash balances with brokers for futures contracts and the corresponding receivable/payable on open futures contracts.
• These adjustments did not affect the Funds performance, investment results, net asset values, income, or distributions.
• The errors were related to Futures Commission Merchant accounts of one broker and did not impact the net futures exposure of the Funds.
• The amended filing includes restated financial statements for the fiscal year ended December 31, 2023, as well as for the quarterly periods ended March 31, 2024, and June 30, 2024.
• Management has concluded that the Trusts disclosure controls and procedures with respect to controls related to the classification of the account balances with futures commission merchants were not effective as of December 31, 2023.
• Management also concluded that the Trusts internal control over financial reporting with respect to such account balances was not effective as of December 31, 2023, due to a material weakness in the design of a control activity.
• The amended filing includes certifications from the principal executive officer and principal financial officer of the Trust.

Sentiment

Score: 4

Explanation: The document is primarily factual and corrective, but the identification of a material weakness and the need for restatement are negative indicators. The sentiment is therefore slightly negative.

Positives

• The reclassifications did not impact the Funds performance, investment results, net asset values, income, or distributions.
• The errors were related to Futures Commission Merchant accounts of one broker and did not impact the net futures exposure of the Funds.

Negatives

• Management has concluded that the Trusts disclosure controls and procedures with respect to controls related to the classification of the account balances with futures commission merchants were not effective as of December 31, 2023.
• Management also concluded that the Trusts internal control over financial reporting with respect to such account balances was not effective as of December 31, 2023, due to a material weakness in the design of a control activity.

Risks

• The document identifies a material weakness in internal control over financial reporting, which could lead to future misstatements.
• The document notes that the Funds are subject to counterparty risks, which could lead to losses if counterparties fail to perform.
• The document notes that the Funds are subject to market risks, which could lead to losses if the value of the Funds investments decline.
• The document notes that the Funds are subject to regulatory risks, which could lead to changes in the Funds operations and profitability.

Future Outlook

Forward-looking statements made in the Original Form 10-K have not been revised to reflect events, results or developments that occurred or facts that became known to us after the date of the Original Form 10-K, other than the adjustments described above, and such forward-looking statements should be read in conjunction with our filings with the SEC, including those subsequent to the filing of the Original Form 10-K.

Management Comments

• Management determined that the misclassifications described above did not have any impact on the Registrants performance, investment results, net asset values, income and distributions.
• Management has concluded that the Registrants disclosure controls and procedures with respect to controls related to the classification of the account balances with futures commission merchants (FCMs) described above were not effective as of December 31, 2023, and its internal control over financial reporting with respect to such account balances was not effective as of December 31, 2023, due to the following material weakness in internal control over financial reporting with respect to such account balances.

Industry Context

This announcement is specific to ProShares Trust II and its funds, and does not directly relate to broader industry trends, but it does highlight the importance of accurate financial reporting and internal controls for all financial institutions.

Comparison to Industry Standards

• The reclassification of financial statement items is not uncommon in the financial industry, particularly with complex instruments like futures contracts.
• Other companies in the ETF space, such as Direxion and VelocityShares, have also had to make similar adjustments in the past.
• The identification of a material weakness in internal control over financial reporting is a serious matter that requires remediation, and is not uncommon in the financial industry.
• The level of detail provided in the amended filing is consistent with industry standards for transparency and disclosure.

Corporate Governance

Stakeholder Impact

• Shareholders may have reduced confidence in the company due to the restatement and identified material weakness.
• Authorized Participants may be affected by the changes in procedures for creation and redemption of shares.
• The Funds service providers may be affected by the changes in procedures for the classification of FCM accounts.

Next Steps

• The Registrant is concurrently filing amendments to its Quarterly Reports on Form 10-Q/A for the quarters ended March 31, 2024, and June 30, 2024.
• Management will implement a remediation plan to enhance internal controls over financial reporting with respect to the classification of FCM accounts.

Key Dates

Keywords

financial statements, restatement, internal control, futures contracts, classification error, segregated cash balances, disclosure controls, ProShares Trust II, FCM accounts, derivatives