May 19, 2021

Firm Settles FINRA Charges for Suitability Violations on the Sale of ETPs

A firm settled FINRA charges for suitability and supervisory violations related to the sale of non-traditional and volatility-linked exchange traded products ("ETPs").

In a Letter of Acceptance, Waiver, and Consent ("AWC"), FINRA found that the firm, among other things, (i) failed to address the sale of volatility-linked ETPs in its written supervisory procedures, exception reporting, and trading, and (ii) had inadequate procedures for identifying such securities. Additionally, FINRA stated that because the firm failed to ensure that its representatives understood nontraditional and volatility-linked ETPs' features and risks, such representatives made unsuitable recommendations and customers incurred losses by holding onto what should have been short-term positions for longer periods of time. As a result, the firm violated FINRA Rules 2111 ("Suitability"), 3110 ("Supervision"), and 2010 ("Standards of Commercial Honor and Principles of Trade").

Further, FINRA found that the firm:

  • did not offer educational materials to retail customers purchasing collateralized mortgage obligations, in violation of FINRA Rule 2216(b)(2) ("Communications with the Public About Collateralized Mortgage Obligations (CMOs)");

  • allowed a registered representative to be supervised by an individual whose compensation and employment depended on the registered representative; and

  • granted a non-registered person access to firm systems to accept and enter customer orders, in violation of FINRA Rule 1210 ("Registration Requirements").

To settle the charges, the firm agreed to (i) a censure, (ii) a $250,000 fine, (iii) payment of restitution in the amount of $472,007 plus interest, and (iv) an undertaking to retain an independent consultant in accordance with the terms of the AWC.