FINRA fined two subsidiaries of Stifel Financial Corp., Stifel, Nicolaus & Company, Incorporated and Century Securities Associates, Inc., and ordered restitution totaling $1.025 million over unsuitable recommendations of leveraged and inverse ETFs and related supervisory deficiencies.
FINRA Case #2012034576901 & #2011025493401
According to FINRA's statement on the matter, Stifel and Century made a series of unsuitable recommendations of these non-traditional ETFs to clients because some representatives "did not fully understand" the risks and unique properties of the complex ETF products.
FINRA found that the leveraged and inverse ETFs were then marketed and sold to customers, including many with conservative investment objectives who purchased the complex products based on the uneducated broker or advisers' improper recommendations, resulting in net losses, notably for those who held ETF investors for longer periods of time. The alleged misconduct occurred between January 2009 and June 2013.
Leveraged and inverse or "non-traditional" ETFs are products set on a day-by-day basis. Because ETFs are reset daily and designed to meet daily objectives, they are generally considered unsuitable for long-term investments and investors with conservative or low-to-moderate risk tolerances. These kinds of ETFs tend to work better for short-term investors with acceptance of higher risk.
In a June 2009 Regulatory Notice, FINRA directly advised its membership that due to their unique features, non-traditional ETFs "are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets."
The notice further stated that leveraged and inverse ETF recommendations to customers "must be suitable and based on a full understanding of the terms and features of the product recommended." FINRA also reminded firms of their obligations in establishing and maintaining adequate supervisory procedures to ensure compliance with the above obligations. (Regulatory Notice 09-31: FINRA Reminds Firms of Sales Practice Obligations Relating to Leveraged and Inverse Exchange-Traded Funds).
FINRA found that Stifel and Century failed to establish and maintain a reasonable supervisory system, including written procedures ("WSPs") for non-traditional ETF sales. The findings further state both firms supervised and treated leveraged and inverse ETFs in the same manner they treated traditional ETFs, failing to address the added risk associated with the more complex products.
Accordingly, the firms allegedly failed to ensure their registered representatives were properly educated and trained in complex product suitability and instead, allowed representatives to recommend inverse and leveraged ETFs to customers for whom the products were not suitable.
FINRA fined Stifel $450,000 and ordered $338,128 in restitution, payable to 59 affected customers. Century agreed to a fine of $100,000 and $136,485 in restitution to six customers.
During Week 1 of 2014, FINRA announced its intention to target the issue of suitability of recommendations for complex products, identifying non-traditional ETFs as part of a "road map" of issues that pose risks to investors. The regulatory body noted that brokers may put clients in financial jeopardy by improperly suggesting these complex products to conservative investors and vowed to step up scrutiny of complex ETF sales.
FINRA highlighted the issue in a follow-up section concerning suitability concerns specifically regarding senior citizen investors, calling into question both the issue of suitability and how (or if) firms have taken steps to protect elderly clients who may be more vulnerable to financial abuse in regards to complex product transactions.
If you have invested with Stifel Financial, Century Securities or with any broker, adviser or firm whose recommendations and sales of non-traditional ETFs or another complex investment product has been unsuitable given you investment objectives, and this improper incurrence of risk has proven harmful to your financial interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.