The Financial Industry Regulatory Authority (FINRA) recently sanctioned brokerage firm Felt & Company (Felt) alleging that between January 2009, and September 2012, Felt failed to establish and supervisory system that was reasonably designed to ensure that sales leveraged or inverse exchange-traded funds (Non-Traditional ETFs) complied with all applicable securities laws.
Feltl is headquartered in Minneapolis, Minnesota, has approximately 114 registered representatives operating out of eight branch offices in Minnesota and Illinois. Felt derives revenue from securities commissions, underwriting, and investment company activity and has been a FINRA member since 1975. This most recent FINRA action is not the first time the regulatory has brought an action concerning issues of how Felt sells securities products to investors. As we previously reported, FINRA sanctioned Feltl and imposed a $1,000,000 fine concerning allegations that the firm, between January 2008, and February 2012. failed to comply with the suitability, disclosure, and record-keeping requirements engaging in a penny stock business.
In the most recent disciplinary action, FINRA alleged that the securities laws requires a firm to have a reasonable basis for believing that a product is suitable for any customer before recommending any purchase of that product. In order to meet this requirement, a firm must understand the terms and features of the product including how they are designed to perform, how they achieve that objective, and the impact that market volatility on the product. In the case of Non-Traditional ETFs the use of leverage and the customer’s intended holding period are significant considerations in recommending these products.
FINRA alleged that despite this explicit guidance, Felt and its representatives failed to exercise due diligence on Non-Traditional ETFs by failing to either assign a committee or persons to review or approve the ETFs, implement firm-wide measures to research the ETFs until the firm had sold them to customers for nearly four years, provide its personnel with adequate training, or provide brokers and their supervisors information concerning the salient characteristics and risk factors of of the ETFs. In addition, FINRA found that Feltl did not implement adequate procedures to monitor the length of time customers held open positions in Non-Traditional ETFs or the effect of extended holding periods on those positions.
FINRA also found that Feltl acting through some of its brokers recommended Non-Traditional ETFs to hundreds of retail customers between January 2009, and September 2012 during which the customers bought and sold approximately $270 million worth of the ETFs. FINRA found that many of these transactions occurred in the accounts of customers who did not want to take aggressive risks in their investment accounts and for whom investments with a high risk of loss were inappropriate. FINRA also found that many of the ETF transactions resulted in customers holding them for extended periods of time including months and sometimes years.
Investors who have suffered losses through their brokerage firm’s recommendations may be able recover their losses through securities arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of unsuitable investments and failure to supervise their representatives. Our consultations are free of charge and the firm is only compensated if you recover.