Securities Lawyers Blog
Between March 16, 2009, and September 21, 2012, FINRA alleged that Sunset Financial Services, Inc., (Sunset) failed to establish and maintain a supervisory system regarding the sale of leveraged or inverse exchange-traded funds, otherwise known as nontraditional ETFs, that was reasonably designed to comply with NASD Conduct Rule 3010.
Sunset has its principal offices in Kansas City, Missouri and is wholly-owned by Kansas City Life Insurance Company, Inc., an insurance company. Sunset has approximately 302 branch offices, 504 registered individuals and 197 non-registered individuals associated with the firm.
FINRA alleged that Sunset’s written supervisory procedures did not address the selling of nontraditional ETFs in any fashion. A leveraged ETF employs financial debt in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. For example, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse of the benchmark.
Leveraged ETFs are generally used for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. FINRA has acknowledged that leveraged ETF carry significant risks and are inherent complexity of the products. Accordingly, FINRA has advised brokers that nontraditional ETFs are typically not suitable for retail investors.
In this case, FINRA alleged that Sunset did not conduct due diligence on the nontraditional ETF products before allowing their representatives to recommend them to customers. Despite the unique features and characteristics of nontraditional ETFs, FINRA alleged that Sunset did not provide its representatives or supervisors with any training or other guidance regarding appropriate sales of nontraditional ETFs for customers. In addition, Sunset failed to place restrictions on its customers’ ability to purchase nontraditional ETFs in their accounts. FINRA also found that Sunset did not create supervisory reports or other tools to monitor the length of time that customers held nontraditional ETFs or customer losses in those positions.
FINRA concluded that that Sunset failed to establish and maintain a supervisory system, including written procedures, to reasonably supervise the sale of nontraditional ETFs to achieve compliance with applicable NASD and FINRA Rules. Sunset was fined $20,000 for its conduct.
The attorneys at Gana Weinstein LLP are experienced in investigating claims concerning the sale of securities, including leverage or nontraditional ETFs. Our attorneys can help you detect and uncover suspicious activity in your accounts. Our consultations are free of charge and the firm is only compensated if you recover.