Broker-dealer Saxony Securities, Inc. (“Saxony”) was recently fined $15,000 over allegations by The Financial Industry Regulatory Authority (FINRA), the regulator of securities broker-dealers, that Saxony failed to establish and maintain a supervisory system, including written procedures, regarding the sale of leveraged or inverse exchange-traded ETFs that was reasonably designed to achieve compliance with the FINRA rules.
Saxony has been registered with FINRA since 2002. Saxony has its main offices in St. Louis, Missouri and employs approximately 100 registered representatives at the firm’s 50 branch offices.
Nontraditional ETFs are designed to return a multiple of some underlying index or benchmark such as the Dow Jones, S&P 500, or other targeted index. Some nontraditional ETFs return the inverse of that benchmark or index. These nontraditional ETFs are supposed to be held only for a one trading session – usually a single day. As a result, the performance of nontraditional ETFs over periods of time longer than a single trading session can be significantly different from the performance of their underlying index or benchmark. Accordingly, Nontraditional ETFs are inherently risky and complex products. FINRA has advised brokerage firms that nontraditional ETFs are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.
FINRA alleged that between April 1, 2009, and March 1, 2010, Saxony permitted its registered representatives to recommend and sell nontraditional ETFs to firm customers. FINRA found that the firm did not properly investigate the risk factors of nontraditional ETF products before allowing their representatives to recommend them to customers. Moreover, Saxony’s written supervisory procedures did not address the supervision of nontraditional ETFs.
Despite the unique characteristics and the risk factors noted above, FINRA alleged that Saxony did not provide its representatives or supervisors with any training or other guidance specific to whether and when nontraditional ETFs might be appropriate for their customers. FINRA also found that Saxony did not use any reports or other tools to monitor the length of time that customers held positions in nontraditional ETFs or losses occurring in those positions.
The attorneys at Gana 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.