Dual Registrant Fined $8 Million for Unsuitable Sales of Volatility-Linked ETPs
A large dual registrant was fined $8 Million for allowing unsuitable sales of a volatility-linked exchange traded product.
The SEC faults the firm for allowing its discretionary financial advisers to buy and hold the product in client accounts when it knew that the product was created for short-term volatility management. As a result, clients incurred significant roll costs related to the underlying futures. The respondent, acknowledging the suitability risks, had already curtailed use of the product in its brokerage business. Although the firm applied concentration limits, its system failed to flag and enforce violations because of internal coding errors. The SEC asserts that the firm lacked procedures for regular auditing of the system and the concentration limits.
How does this happen after both the SEC and FINRA have repeatedly issued warnings about the suitability of leveraged, inverse, and short-term exchange-traded products for retail clients? We think this firm skated with a mere $8 Million fine given that it already knew and acknowledged the risks, yet disregarded compliance implementation when it came to its financial advisers.
Read SEC Order here.