Weak Compliance Results in $35 Million Fine for Unsuitable Recommendations
The SEC fined a large dual registrant $35 Million for widespread compliance failures allowing the unsuitable recommendations of single inverse ETFs to retail investors. Over the relevant 7-year period, the respondent recommended single inverse ETFs to over 40,000 retail clients, many of whom with conservative investment objectives and long-term investment horizons. The firm knew that the product was intended for one-day hedging against index fluctuations, not for long-term investing. Many clients had significant losses. The SEC asserts that the firm’s compliance policies and procedures failed to ensure adequate training, supervision and monitoring even though the firm had promised to enhance compliance following a 2012 FINRA action.
This firm engaged in what we call “compliance alchemy” i.e. the semblance of a compliance program without any real substance. Just because you have adopted policies doesn’t mean that you have implemented the necessary procedures to detect and correct the bad conduct. When your firm makes 40,000 allegedly unsuitable recommendations over a 7-year period after settling with FINRA, you have a compliance problem.