PNC Investments Fined by FINRA Over Sale of Non-Traditional ETFs

The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm PNC Investments LLC, (PNC) concerning allegations from January 2008, through June 2009, PNC failed to establish a supervisory system, including written procedures, reasonably designed to achieve compliance with the FINRA rules in connection with the sale of leveraged, inverse, and inverse leveraged Exchange-Traded Funds (Non-Traditional ETFs).

Non-Traditional ETFs have grown in popularity since 2006.  By April 2009, over 100 Non-Traditional ETFs had been issued with total assets of approximately $22 billion.  Leveraged ETFs seek to deliver multiples an index or benchmark the ETF tracks.  Some Non-Traditional ETFs are “inverse” or “short” funds that return the opposite of the performance the index or benchmark. ETFs can also be both inverse and leveraged and return a multiple of the inverse performance of a index or benchmark.  Non-Traditional ETFs contain significant risks that are not found in traditional ETFs.   Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding.

In addition, the performance of Non-Traditional ETFs over long periods of time can differ significantly from the performance of the underlying index or benchmark it tracks.  For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF seeking to deliver twice the index’s daily return fell six percent.  In addition, a related ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.  These risks prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.

Nonetheless, FINRA alleged that PNC supervised Non-Traditional ETFs in the same way it supervised traditional ETFs.  Thus, FINRA found that PNC failed to establish a reasonable supervisory system and written procedures to monitor the sale of Non-Traditional ETFs.  FINRA also found that PNC failed to adequate train representatives regarding the sale Non-Traditional ETFs.  Consequently, FINRA found that certain PNC registered representatives did not have an adequate understanding of Non-Traditional ETFs before they recommended these products to customers in violation of FINRA’s suitability rule.

FIRNA found that from January 2008, through June 2009, PNC customers bought and sold a total of approximately $73 million of Non-Traditional ETFs.  FINRA further alleged that despite the risks of holding Non-Traditional ETFs for longer periods than one day certain PNC customers held Non-Traditional ETFs for extended time periods.  According to FINRA, certain PNC customers with a primary investment objective of Income held Non-Traditional ETFs for periods of several months. In one instance, FINRA found that a 95 year old customer with a net worth of $500,000 and over held a Non-Traditional ETF for 69 days in his account and sustained losses of over $7,349.

As a result, FINRA fined PNC in the amount of $275,000 and ordered restitution in the amount of $33,183.72.  The attorneys at Gana LLP are experienced in investigating claims concerning the sale of leverage or nontraditional ETFs.  Our consultations are free of charge and the firm is only compensated if you recover.