The Financial Industry Regulatory Authority (FINRA) sanctioned (Case No. 2014038906201) brokerage firm BestVest Investments, Ltd. (BestVest) concerning allegations that from January 2012, through August 2014, BestVest 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).
As a background, Non-Traditional ETFs behave drastically different and have different risk qualities from traditional ETFs. While traditional ETFs seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs are also used to earn the inverse result of the return of the benchmark.
However, the risks of holding Non-Traditional ETFs go beyond merely multiplying the return on the index. Instead, Non-Traditional ETFs are generally designed to be used only for short term trading as opposed to traditional ETFs. The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time. 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. In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.
Because of these risks, 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. Consequently these funds typically have very limited uses and in many cases are completely inappropriate for retail investors who have long term objectives. Increasingly, brokerage firms are prohibiting the solicitation of these investments to its customers due to suitability concerns.
FINRA alleged that BestVest allowed its brokers to recommend and sell Non-Traditional ETFs to customers but that the firm’s written supervisory procedures did not address the sale or supervision of Non-Traditional ETFs. FINRA alleged that despite the unique features and risk factors of Non-Traditional ETFs the firm did not provide its brokers or its supervisors with training or other guidance on whether and Non-Traditional ETFs might be appropriate for their customers. ln addition, FINRA found that BestVest did not use or make available to its supervisors personnel any reports or other tools to monitor transactions of Non-Traditional ETFs including the length of time that customers held open positions. FINRA found that through the firm’s conduct BestVest failed to establish and maintain a supervisory system regarding the sale of Non-Traditional ETFs that were reasonable.
Investors who have suffered losses may be able recover their losses through securities arbitration. The attorneys at Gana LLP are experienced in representing investors in cases of unsuitable investments. Our consultations are free of charge and the firm is only compensated if you recover.