Firm Settles FINRA Charges for Non-Traditional ETF Supervisory Failures

A firm settled FINRA charges for failing to maintain a supervisory system reasonably designed to oversee recommendations of leveraged and inverse exchange-traded funds.

According to the AWC, the firm failed to detect 47 instances where representatives recommended daily-reset Non-Traditional ETFs to retail customers that were potentially not in the customers' best interest. FINRA noted that customers held positions beyond the intended single-day holding period, with one customer holding a position for 630 days.

FINRA found that the firm’s procedures did not describe methods for supervisors to identify improper recommendations and failed to implement tools, such as alerts or exception reports, to detect recommendations that potentially violated the firm's best interest obligations. FINRA found that although the firm cautioned representatives to consider holding periods, it lacked any system to verify if representatives actually considered them. FINRA also found that the firm failed to provide training to its representatives or supervisors regarding the terms, features, and risks of Non-Traditional ETFs, despite regulatory guidance regarding the effects of compounding over extended periods.

As a result, FINRA determined that the firm failed to establish written policies and procedures adequately tailored to the supervision of Non-Traditional ETFs.

FINRA determined the firm violated Exchange Act Rule 15l-1(a)(1) ("Regulation Best Interest") and FINRA Rules 3110 ("Supervision") and 2010 ("Standards of Commercial Honor and Principles of Trade").

To settle these charges, the firm agreed to a censure, a $25,000 fine, and restitution of $20,571.29 plus interest. The firm also adopted procedures prohibiting its representatives from recommending Non-Traditional ETF purchases.