FINRA Orders Firms to Pay Fines for Unsuitable Sales of ETFs and Supervisory Deficiencies (with Lofchie Comment)

FINRA announced that it ordered two affiliated broker-dealers to pay fines and restitution for the unsuitable sales of leveraged and inverse exchange-traded funds ("ETFs") and related supervisory deficiencies.

According to the release, FINRA found that the broker-dealers made unsuitable recommendations for non-traditional ETFs to certain customers between January 2009 and June 2013. Some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs; however, the firms allowed the representatives to recommend the ETFs to retail customers. FINRA also found that the firms did not have reasonable supervisory systems in place, such as written procedures for the sales of leveraged and inverse ETFs.

Lofchie Comment:This disciplinary action is consistent with a number of recent FINRA statements with regard to suitability practices and examination priorities. See, e.g., FINRA Releases 2014 Regulatory and Examination Priorities (with Lofchie Comment); FINRA Podcast on Suitability: Effective Practices (with Lofchie Comment); FINRA Regulatory Notice 13-31: Examination Approaches, Common Findings and Effective Practices for Complying with Suitability Rule (with Lofchie Comment). This enforcement action is notable as it focuses on the fact that a firm will not be in a position to make suitability assessments with respect to their customers if firm employees do not understand the products they sell.

See: FINRA Letter of Acceptance, Waiver, and Consent; FINRA Press Release.