The Financial Industry Regulatory Authority (FINRA) fined broker-dealer, Berthel Fisher & Co. Financial Services and its affiliate, Securities Management & Research, Inc., a combined $775,000. FINRA alleged supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of alternative investments. FINRA also found that Berthel Fisher’s failure to supervise extended to non-traditional exchange traded funds (ETFs).
FINRA found that from January 2008 to February 2012, Berthel Fisher had inadequate supervisory systems and lacked proper written supervisory procedures with regards to the sales of these alternative investments, namely non-traded real estate investment trusts (REITs), managed futures, oil and gas programs, equipment leasing programs, and business development companies. In its report, FINRA also alleged that some investors were sold these products at a level of concentration that exceeded their respective investment objectives, making the sales and recommendations unsuitable. FINRA also claims that Berthel Fisher failed to train its employees on individual state suitability standards.
FINRA also found that from April 2009 to April 2012, Berthel Fisher did not have a reasonable basis for the sale of leveraged and inverse ETF’s. Before a registered firm may allow its registered representatives to recommend such products to its customers, it must conduct adequate research and review. Through its investigation, FINRA learned that Berthel Fisher representatives recommended approximately $49 million in these nontraditional ETF’s. Leveraged and inverse ETF’s expose holders to amplified movements that tend to deviate from their related benchmarks over extended periods of time. These products are often focused on short-term investment returns and subject to extreme movements during volatile markets, with the potential for significant loss of principal. According to FINRA, Berthel sold these products to conservative, buy-and-hold investors, sales that FINRA ultimately deemed unsuitable.
FINRA has continued to make a point that a heightened culture of compliance is absolutely necessary as the markets grow in size and complexity. Brad Bennett, FINRA’s Executive Vice President of Enforcement, said, “A strong culture of compliance is an essential element of the proper marketing of complex products. Berthel’s supervision of the sales of non-traded REITs, inverse ETFs, and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.”
FINRA has highlighted this concern in this instance, by including in part of the settlement with Berthel, a mandate instructing Berthel to obtain an independent consultant to improve its supervisory procedures as they relate to the sales of alternative investments. FINRA’s objective is to continue to discipline firms with lax compliance measures and to ensure the proper training of broker dealer representatives, who are responsible for recommending these new and complex products. Employees must fully comprehend the nature and risks of these products to make proper suitability determinations. Only then, may they properly recommend these investment ideas to their customers, being sure to include a comprehensive discussion of the associated risks.
The attorneys at Gana LLP are experienced in investigating claims of failure to supervise and can help you to analyze your account holdings to determine whether your advisor’s recommendations were unsuitable. Our consultations are free of charge and the firm is only compensated if you recover.
By: Daniel Gwertzman