Calton & Associates Sanctioned Over Volatile Exchange-Traded Product (ETP) Supervision Failures

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FINRA censured and fined Calton & Associates $250,000, ordering an additional $472,000 in restitution for a series of supervisory failures related to Calton's non-traditional and volatility-linked exchange-traded product (ETP) business, including its recommendation and sales of leveraged ETPs, inverse ETPs, and the more complex leveraged-inverse ETPs.

AWC #2018060466201 sanctioning Calton cited volatility-linked ETPs as another area of concern, noting that the ETPs linked to the market's volatility index (VIX) "may be unsuitable for certain retail investors, particularly those who plan to use them over the long-term as traditional buy-and-hold investments." For instance, FINRA in November 2020 fined Royal Alliance Associates over its own volatility-linked ETP failures, including the iPath S&P 500 VIX ETN called VXX.

FINRA found that Calton failed to establish and maintain a reasonable supervisory system relative to non-traditional and volatility-linked ETPs, failed to supervise sales of non-traditional and volatility-linked ETPs, and even made unsuitable recommendations to purchase non-traditional and volatility-linked ETPs, which FINRA has previously warned is not suitable for more conservative/risk-averse clients or customers who plan on holding the products for longer than a short-term basis.

Investigators cited Calton's sales of the mortgage-backed CMO securities product as another instance of Calton failing to supervise sales, noting that Calton sold CMOs, also known as collateralized mortgage obligations, to hundreds of customers through at least 33 registered representatives.

In 2018, we traced the dangerous volatility-linked VelocityShares Daily Inverse VIX Short-Term Exchange-Traded Note issued by Credit Suisse and known as XIV, uncovering several previous instances of FINRA enforcement against stockbrokers and firms that recommended XIV, VXX and similar offerings, such as a $3.4 million penalty against Wells Fargo for unsuitably recommending volatility-linked ETPs, suspension of Global Arena Capital broker James Flower for unsuitably recommending VXX resulting in approximately $250,000 in customer losses, and investigation of Newport Coast Securities brokers David M Levy, Antonio Costanzo, and Donald A Bartelt, whom FINRA also charged with churning the accounts of 24 Newport Coast Securities clients causing $1 million in damages.

In March 2021, Calton & Associates president Dwayne Calton stated, "we routinely have legal issues. It's part of the business," and indicated the firm was preparing to pay nearly $500,000 in restitution to resolve proceedings related to its sale of leveraged exchange-traded funds (ETFs).

The Securities Litigation & Consulting Group previously included Calton & Associates on its list of broker-dealers employing the greatest percentage of representatives with resolved customer complaints, noting that 14.56% of brokers employed at Calton in 2017 had a BrokerCheck file containing a resolved dispute.

If you invested with Calton & Associates, or with any firm, broker, or investment adviser who recommended you purchase a non-traditional or volatility-linked exchange traded product, ETF, ETN, or other security with a risk exposure not in accordance with your tolerance preferences, investment objectives, or time horizon, and this unsuitable recommendation resulted in losses or other damages, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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