Broker-Dealer Entities Fined $35 Million for Violations Relating to Inverse ETF Recommendations to Retail Investors

March 12, 2020

The SEC recently fined two dual registrant broker-dealers $35 million for violations involving inadequate compliance policies and procedures, unsuitable recommendations and failure to supervise arising out of recommendations to certain retail investors that invested in single-inverse ETFs. Single-inverse ETFs are ETFs that seek returns that are the opposite of the returns of a benchmark index on a given day. These ETFs typically disclose in their prospectuses the risk that they may not be suitable for investors with long-term time horizons because the investment returns of a single-inverse ETF will not, over time, track the inverse of an index over periods longer than one day.

The SEC’s order alleged that the broker-dealers had recommended that certain retail investors, including those investing through retirement accounts, invest in single-inverse ETFs, sometimes for months or years. The broker-dealers’ policies did not require training for or include other appropriate steps to educate financial advisors and their supervisors with respect to considerations specific to single inverse ETFs, despite the broker-dealers having been sanctioned by FINRA in 2012 for (i) the failure to establish adequate procedures to monitor non-traditional ETF sales; (ii) the failure to train and provide guidance registered representatives and supervisors on non-traditional ETFs; and (iii) making unsuitable recommendations to customers with respect to non-traditional ETFs. Although the broker-dealers enhanced their procedures after this FINRA action, the procedures and related training protocols remained deficient and ineffective. These procedure and training deficiencies led to the violations discussed in the SEC’s 2020 order.

The order is available here: https://www.sec.gov/litigation/admin/2020/34-88295.pdf


Categories

Compliance, Enforcement Actions, Exchange-Traded Funds (ETFs), Investment Advisers