Fri, 10/01/2014 - 10:05
The Financial Industry Regulatory Authority (FINRA) has ordered broker-dealers Stifel, Nicolaus & Company and Century Securities Associates to pay over USD1m over the sale of unsuitable exchange-traded funds to certain clients.
The payments in combined fines of USD550,000 and a total of nearly USD475,000 in restitution to 65 customers in connection with sales of leveraged and inverse ETFs.
Stifel and Century are affiliates and are both owned by Stifel Financial Corporation.
Brad Bennett, FINRA executive vice president and chief of enforcement, says: "The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers. Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors."
Leveraged and inverse ETFs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis so their performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets.
FINRA found that between January 2009 and June 2013, Stifel and Century made unsuitable recommendations of non-traditional ETFs to certain customers because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs; nonetheless, Stifel and Century allowed the representatives to recommend them to retail customers. Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms' representatives, and who held those investments for longer periods of time, experienced net losses.
FINRA also found that Stifel and Century did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Stifel and Century generally supervised transactions in leveraged and inverse ETFs in the same manner that they supervised traditional ETFs, and neither firm created a procedure to address the risk associated with longer-term holding periods in the products. Further, both firms failed to ensure that their registered representatives and supervisory personnel obtained adequate formal training on the products before recommending them to customers.
Stifel agreed to pay a fine of USD450,000 and to make restitution of nearly USD340,000 to 59 customers. Century agreed to pay a fine of USD100,000 and to make restitution of more than USD136,000 to six customers.
In settling this matter, Stifel and Century neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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