FINRA recently announced that it has ordered two St. Louis-based broker-dealers – Stifel, Nicolaus & Company, Incorporated and Century Securities Associates, Inc. – to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse exchange traded funds (ETFs). Stifel Nicolaus and Century Securities are affiliates and are both owned by Stifel Financial Corporation.
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. For these reasons, leveraged and inverse ETFs are generally considered high-risk investments.
FINRA found that between January 2009 and June 2013, Stifel Nicolaus and Century Securities 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, FINRA found that Stifel Nicolaus and Century Securities allowed the representatives to recommend them to retail customers. FINRA also determined that 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.
Additionally, FINRA found that Stifel Nicolaus and Century Securities did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Stifel Nicolaus and Century Securities 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 Nicolaus agreed to pay a fine of $450,000 and to make restitution of nearly $340,000 to 59 customers. Century Securities agreed to pay a fine of $100,000 and to make restitution of more than $136,000 to six customers.
In settling this matter, Stifel Nicolaus and Century Securities neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
The foregoing information, which is available on FINRA’s website, is being provided by The White Law Group. The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Boca Raton, Florida.
For a free consultation with a securities attorney, please call the firm at 312/238-9650. For more information on The White Law Group, visit http://www.whitesecuritieslaw.com.