10-Q/A: ProShares Trust II Amends Quarterly Report After Identifying Classification Errors

ProShares Trust II has amended its quarterly report for the period ended June 30, 2024, to correct classification errors in its financial statements related to futures contracts.

Summary

• ProShares Trust II has filed an amended quarterly report on Form 10-Q/A for the period ended June 30, 2024, to correct classification errors in its financial statements.
• The errors involved an understatement of segregated cash balances with brokers for futures contracts and an overstatement or understatement of receivable/payable on open futures contracts.
• These errors also impacted the Statements of Cash Flows, specifically within the decrease/increase in receivable/payable on open futures contracts, net cash provided by/used in operating activities, cash beginning of period and cash end of period.
• Management determined that these misclassifications 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 had no impact on the net futures exposure to the Registrant.
• The amendment also includes restatements of the Annual Report on Form 10-K/A for the year ended December 31, 2023, and the Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2024, to correct the same errors.
• Management has re-evaluated the effectiveness of the Trusts disclosure controls and procedures and internal control over financial reporting as of June 30, 2024, and concluded that they were not effective due to a material weakness in the design of a control activity with respect to the presentation of the FCM accounts.

Sentiment

Score: 3

Explanation: The document reveals a material weakness in internal controls and requires restatement of prior financial statements, which is a negative signal. However, the impact on net asset value and investment results is stated to be nil, which mitigates the negative sentiment somewhat.

Positives

• The misclassifications 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 had no impact on the net futures exposure to the Registrant.

Negatives

• A material weakness in internal control over financial reporting was identified related to the classification of FCM accounts.
• 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 June 30, 2024.

Risks

• The document highlights a material weakness in internal control over financial reporting, specifically related to the classification of FCM accounts.
• There is a risk that the identified errors could indicate broader issues with the Trusts accounting and reporting processes.
• The restatement of prior financial statements could lead to a loss of investor confidence.
• The document notes that the Funds forward-looking statements have not been revised to reflect events, results or developments that occurred or facts that became known after the date of the Original Form 10-Q, 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-Q.

Future Outlook

Forward-looking statements made in the Original Form 10-Q have not been revised to reflect events, results or developments that occurred or facts that became known after the date of the Original Form 10-Q, 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-Q.

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 June 30, 2024, and its internal control over financial reporting with respect to such account balances was not effective as of June 30, 2024.

Industry Context

This announcement is specific to ProShares Trust II and its funds, and does not directly relate to broader industry trends or competitors, other than the general regulatory environment for investment companies.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards, but it does note that the Funds follow the investment company accounting and reporting guidance as defined by the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 946 Financial Services Investment Companies.
• The document also notes that the Sponsor may fair value an asset of a Fund pursuant to the policies the Sponsor has adopted, which are consistent with normal industry standards.

Corporate Governance

Stakeholder Impact

• Shareholders may experience a loss of confidence due to the restatement of financial statements and the identified material weakness.
• The Funds service providers may be impacted by the changes in procedures and reviews relating to the classification of Futures Commission Merchant balances for financial reporting purposes.

Next Steps

• The Registrant is concurrently filing amendments to its Annual Report on Form 10-K/A for the year ended December 31, 2023, and Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2024.
• Management will continue to implement a remediation plan to enhance its internal controls over financial reporting with respect to controls related to the classification of the FCM accounts.

Key Dates

Keywords

ProShares Trust II, financial statements, classification errors, futures contracts, internal control, material weakness, restatement, FCM accounts, disclosure controls, Form 10-Q