Broker-Dealer Fined for Failing to Supervise NT-ETP Suitability
Commentary by Nick Allen
A broker-dealer settled FINRA charges for failing to implement a supervisory system reasonably designed to monitor the suitability of recommendations in complex, non-traditional exchange-traded products ("NT-ETPs"), primarily inverse and leveraged exchange-traded funds or notes.
In a Letter of Acceptance, Waiver and Consent, FINRA found that the broker-dealer allowed its representatives to offer the NT-ETPs to retail customers on a solicited basis without proper monitoring, despite two prior warnings in 2014 and 2018. FINRA found that the manual blotter reviews submitted to supervisors did not include holding period information despite the risks associated with holding such products for extended periods of time. FINRA said that none of the customers who held positions for more than a week sold the positions at a loss. FINRA also noted that after the first warning, the broker-dealer agreed to immediately cease soliciting trades in NT-ETPs but continued to do so.
The broker-dealer was found to have violated FINRA Rule 2010 ("Standards of Commercial Honor and Principles of Trade") and Rule 3110 ("Supervision"). FINRA reiterated that a broker-dealer's Rule 3110 obligations include establishing a reasonable system to supervise for compliance with FINRA Rule 2111 ("Suitability"). To settle the charges, the broker-dealer agreed to (i) a censure and (ii) a civil monetary penalty of $25,000.
Commentary
FINRA has often discussed broker-dealers' obligations, including suitability and supervisory requirements, as they relate specifically to complex products - whether exchange-traded (as was the case here) or, e.g., OTC structured products. This action serves as another important reminder that compliance with those obligations cannot be satisfied by a one-size-fits-all approach; policies and procedures must take into account the particular characteristics and risks of the relevant products.