Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) entered into an agreement whereby the regulatory fined Broker Dealer Financial Services Corp. (BDFS) concerning allegations that between March 2009 and April 2012, BDFS failed to establish and maintain a supervisory system, including written procedures, that was reasonably designed to ensure that the firm’s sales of leveraged or inverse exchange-traded funds (Non-Traditional ETFs) complied with the securities laws.
BDFS is a FINRA member firm since 1979 and headquartered in West Des Moines, Iowa. The firm employs about 270 registered representatives located in more than 130 branch offices throughout the country.
According to FINRA, from March 2009 to April 2012, BDFS failed to implement a supervisory system, including written procedures, reasonably designed to ensure the suitability of Non-Traditional ETF sales. For instance, FINRA issued guidance that specifically dealt with issues related to the sales and supervision of Non-Traditional ETFs. FINRA’s guidance requires a firm to have a reasonable basis for believing that a product is suitable for any customer before recommending any purchase of that product. Part of having a reasonable basis for making the recommendation includes understanding the terms and features of the Non-Traditional ETFs being offered including how they are designed to perform, how they achieve that objective, and the impact that market volatility, the ETF’s use of leverage, and the customer’s intended holding period.
Despite FINRA’s guidance, BDFS was alleged to have failed to exercise due diligence in investigating Non-Traditional ETFs before allowing the firm’s brokers to recommend them to customers. FINRA found that there no BDFS committee or persons assigned to review or approve Non-Traditional ETFs before sale, nor did it undertake any firm-wide measures to research the investment products until the firm had sold them to customers for nearly four years.
FINRA also found that BDFS failed to provide its personnel with adequate training regarding the products. For instance, FINRA alleged that BDFS did not require that its principals or registered representatives complete product-specific training on Non-Traditional ETFs before recommending them to customers. In addition, FINRA found that BDFS did not implement adequate procedures requiring its personnel to monitor either the length of time customers held open positions in Non-Traditional ETFs or the effect of extended holding periods on those positions.
FINRA also found fault with the firm’s limited supervisory procedures stating that, among other things, the firm did not caution against recommending Non-Traditional ETFs to customers with moderate or conservative risk profiles and that the firm’s sales exception reports and supervisory tools did not have any means to differentiate between a Non-Traditional ETFs and other exchange-traded securities.
Despite the foregoing failures, FINRA alleged that BDFS, through its registered representatives, recommended Non-Traditional ETFs to more than 200 retail customers between March 2009 and April 2012. These customers bought and sold approximately $170 million worth of Non-Traditional ETFs. FINRA found that some of those transactions occurred in the accounts of customers who had not stated a desire to take aggressive risks with their investment accounts, or for whom investments with a high risk of loss of principal were otherwise inappropriate.
Investors who have suffered losses may be able recover their losses through securities arbitration. The attorneys at Gana Weinstein LLP are experienced in representing investors in cases of unsuitable investments. Our consultations are free of charge and the firm is only compensated if you recover.