Large Regional to Pay over $1 Million for Selling Leveraged ETFs
A large regional broker-dealer agreed to pay over $1 Million in fines and restitution for recommending leveraged and inverse ETFs to retail customers without conducting adequate due diligence. FINRA charges that the firm’s reps did not “fully understand the unique features and specific risks associated” with the products and failed to conduct specific training or implement necessary supervisory structures. In a 2009 Notice to Members, FINRA advised firms to conduct enhanced due diligence and implement specific procedures before recommending leveraged ETFs. From 2009 through 2013, FINRA asserts that the firm’s customers purchased nearly $700 Million in nontraditional ETFs. FINRA faults the firm for supervising sales of nontraditional ETFs “in the same manner in which they supervised sales of traditional ETFs.” FINRA cites various rule violations including Rule 2111, which requires firms to conduct reasonable basis suitability investigations.
OUR TAKE: The regulators generally don’t bluff. When they say they will focus on a particular topic – in this case nontraditional ETFs – they generally follow up with investigations and enforcement actions. Also, firms that have ignored Rule 2111 should consider implementing a formal process to conduct due diligence on all products they recommend. Some firms have engaged third parties to ensure an adequate and independent process.