Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) has sanctioned Salomon Whitney, LLC (Salomon Whitney) concerning allegations from July 2008 through November 2009 the firm failed to establish and maintain a supervisory system reasonably designed to monitor transactions in leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs). Non-Traditional ETFs contained risks that increase over time and in volatile markets including risks of a daily reset, leverage, and compounding. FINRA found that Salomon Whitney failed to establish a reasonable supervisory system to monitor transactions in Non-Traditional ETFs, provide adequate formal training, and observe reasonable basis suitability guidelines by failing to perform reasonable due diligence to understand the risks and features associated with the products.
Salomon Whitney has been a FINRA broker-dealer since 2008 and the firm is headquartered in Farmingdale, New York where it conducts a general securities business. Salomon Whitney has approximately 19 brokers registered with the firm.
Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on an underlining asset, class of securities, or sector index. The leverage employed by Non-Traditional ETFs is designed to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.
While regular ETFs can be held for long term trading, Leveraged ETFs are generally designed to be used only for short term trading. If held for longer periods, the results can vary drastically from the underlining index. For example, between December 1, 2008 and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent. Another ETF Fund, the ProShares UltraShort Oil and Gas, seeking to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period. The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and FINRA has stated that Non-Traditional ETFs are typically not suitable for most retail investors. To that end, many brokerage firms simply prohibit the solicitation of these investments to its customers.
FINRA found that the number of Non-Traditional ETFs transactions grew by customers at Salomon Whitney during the relevant period. According to FINRA, Salomon Whitney customers bought and sold a total of $25,642,133 of Non-Traditional ETFs. FINRA determined that despite the risks associated with holding Non-Traditional ETFs for longer periods, numerous Salomon Whitney customers held Non-Traditional ETFs for extended time periods during the period examined by FINRA. In sum, FINRA determined that several Salomon Whitney customers held Non-Traditional ETFs for periods of up to several months.
FINRA also found that Salomon Whitney violated NASD Rules 3010 and 2110 and FINRA Rule 2010 by failing to establish and maintain a supervisory system reasonably designed to achieve compliance with the FINRA Rules in connection with the sale of Non-Traditional ETFs and that the firm failed to provide adequate formal training and guidance to its registered representatives and supervisors regarding Non-Traditional ETFs. Instead, FINRA found that Salomon Whitney supervised Non-Traditional ETFs in the same way it supervised traditional ETFs until July 2009. FINRA found that in July 2009, the firm started using a suitability disclosure and acknowledgement document. However, FINRA found that this general supervisory system was not sufficiently tailored to address the unique features and risks involved with these products.
The attorneys at Gana Weinstein LLP are experienced in representing investors in securities arbitration to concerning investments in Non-Traditional ETFs. Our consultations are free of charge and the firm is only compensated if you recover.