10-Q/A: ProShares Trust II Restates Financials After Classification Errors

ProShares Trust II has amended its previous quarterly report to correct classification errors in its financial statements, which did not impact investment results or net asset values.

Summary

• ProShares Trust II has filed an amended 10-Q report to restate financial statements for the quarter ended March 31, 2024.
• The restatement corrects errors in the classification of cash balances and receivables/payables related to futures contracts.
• These errors were identified during the preparation of financial statements for the quarter ended September 30, 2024.
• The misclassifications 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 had no impact on the net futures exposure.
• The restatement also includes amendments to 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 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 March 31, 2024.
• A material weakness was identified in the design of a control activity with respect to the presentation of the FCM accounts within the Statements of Financial Condition and Statements of Cash Flows.

Sentiment

Score: 4

Explanation: The document reveals a material weakness in internal controls and the need for a restatement, which is negative. However, the company is taking steps to remediate the issues, which is a positive. Overall, the sentiment is slightly negative.

Positives

• The errors were classification errors and did not impact the Funds performance, investment results, net asset values, income, or distributions.
• The company is taking steps to remediate the material weakness in internal controls.

Negatives

• The company identified a material weakness in internal control over financial reporting related to the classification of FCM accounts.
• The company had to restate its financial statements for multiple periods.

Risks

• The material weakness in internal control over financial reporting could result in future misstatements of the financial statements or disclosures.
• The company may face increased scrutiny from regulators due to the restatement and material weakness.
• The company may incur additional costs to remediate the material weakness and improve internal controls.

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 to us 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 March 31, 2024, and its internal control over financial reporting with respect to such account balances was not effective as of March 31, 2024.

Industry Context

This announcement highlights the importance of accurate financial reporting and robust internal controls in the investment management industry, particularly for funds that utilize complex financial instruments like futures and swaps. The restatement underscores the need for careful oversight and adherence to accounting standards.

Comparison to Industry Standards

• The errors identified by ProShares are not unique to the company and similar issues have been identified in other investment firms.
• The restatement process is a standard procedure for correcting errors in financial statements and is generally viewed as a sign of good corporate governance.
• The material weakness identified in internal controls is a concern and will need to be addressed to ensure the accuracy of future financial reporting.
• The company's response to the errors, including the restatement and remediation plan, is consistent with industry best practices.

Corporate Governance

Stakeholder Impact

• Shareholders may experience a temporary decrease in confidence due to the restatement and material weakness.
• Employees may be affected by the changes in internal controls and procedures.
• Customers may be concerned about the accuracy of the Funds financial reporting.
• Suppliers and creditors may be impacted by the changes in the Funds financial position.

Next Steps

• The company will implement a remediation plan to address the material weakness in internal control over financial reporting.
• The company will continue to monitor its internal controls and procedures to ensure the accuracy of future financial reporting.

Key Dates

Keywords

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