SEC Settles Charges Against Investment Advisory Firms and Dually-Registered Broker-Dealer and Investment Adviser Firms Related to Sales of Complex Exchange-Traded Products

November 24, 2020

The SEC recently announced that it has entered into settlement agreements with three investment advisory firms and two dually-registered broker-dealer and advisory firms (the firms) related to the firms’ recommendations to retail investors of certain complex exchange-traded products (ETPs) linked to volatility benchmarks, including exchange-traded notes (ETNs) and exchange-traded funds (ETFs).

The ETPs that were the subject of the enforcement actions attempted to track short-term volatility expectations in the market, typically measured against derivates of the CBOE volatility index. The SEC alleged in the settlement actions that the firms’ representatives and brokers ignored disclosures in the ETPs’ offering documents regarding the risk of loss if the ETPs were held for extended periods, and did not have a reasonable basis to determine that recommendations to retail investors of the complex ETPs were suitable.

The orders announcing the settled actions also included allegations of the failure to adopt or implement written policies and procedures reasonably designed to prevent federal securities laws violations regarding the suitability of recommendations of ETPs to retail investor clients and the failure to adequately supervise the activities of sales representatives that recommended the sales. As a result of the orders, the firms were assessed civil penalties ranging from $500,000 to $650,000.

The enforcement actions provide another example of the heightened scrutiny of the SEC and other regulators and self-regulatory organizations (including the CFTC and FINRA) on the recommendations of complex ETPs to retail investors. (See, for example, FINRA Reg. Notice 20-14 and CFTC customer advisory re: commodity ETPs).  In a related initiative, the staffs of the Divisions of Investment Management, Corporation Finance and Trading and Markets recently jointly announced that they will review the current rules that apply to complex ETPs and similar products and may make additional recommendations.

The SEC’s orders announcing the settlement agreements are available at the links below:

https://www.sec.gov/litigation/admin/2020/34-90411.pdf

https://www.sec.gov/litigation/admin/2020/34-90413.pdf

https://www.sec.gov/litigation/admin/2020/ia-5626.pdf

https://www.sec.gov/litigation/admin/2020/ia-5627.pdf

https://www.sec.gov/litigation/admin/2020/ia-5629.pdf


Categories

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