FINRA fined FSC Securities Corporation $100,000 and ordered nearly $500,000 in restitution after finding that FSC failed to establish and maintain adequate supervisory systems regarding its non-traditional ETF business and that FSC representatives recommended Non-Traditional ETFs to customers without fully understanding the products' risks.
FINRA concluded that FSC allowed its registered reps to make unsuitable recommendations of Non-Traditional ETFs to "many customers" with conservative investment objectives and moderate risk tolerance, including elderly clients, for whom a non-traditional product was not appropriate.
As a result of the unsuitable recommendations, FINRA wrote, these customers sustained losses of $492,485 while FSC earned approximately $603,000 in commissions.
Investigators found that FSC Securities Corporation sold unit investment trusts (UITs), leveraged ETFs and inverse ETFs (including "leveraged inverse ETF" products, which are not only inversely related to the index, but seek to achieve a return that is a multiple of the benchmark's inverse performance).
The products often "reset" daily and are thus designed to be traded or held for a relatively short period of time (e.g., a day), and are likely not suitable for investors with longer horizons, such as those conservative and moderate customers described above.
FINRA wrote that FSC's supervisory failures regarding its Non-Traditional ETF business not only allowed to the products to be sold to income- or growth- oriented investors with conservative/moderate risk tolerances, but resulted in the firm's failure to monitor the ETFs' holding periods, and allowed FSC to make unsuitable recommendations of Non-Traditional ETFs to its moderate-minded customers, for whom the products were not appropriate.
For example, FINRA wrote of an 82-year-old customer with "growth and income" investment objectives and a conservative risk tolerance who held a Non-Traditional ETF in her IRA account for 521 days, suffering a $14,251 loss as a result.
Another income/moderate-conservative 67-year old client held the ETF for 1,319 in his IRA account, resulting in $13,420 in losses, according to FINRA's report.
If you have invested with FSC Securities or with any firm, broker, or financial adviser whose recommendations or supervisory/monitoring failures regarding investments in Non-Traditional ETFs, including leveraged ETFs, inverse ETFs, UITs, or leveraged-inverse ETFs has proven harmful to your investments or interests due to the unsuitable product's volatility over a longer holding period not in accordance with your conservative or moderate investment objectives and risk tolerance level, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.