The Financial Industry Regulatory Authority (FINRA) sanctioned Edward D. Jones & Co., L.P. (Edward Jones) concerning allegations that between January 2008 and July 2009, Edward Jones failed to establish and maintain a supervisory system that were reasonably designed to ensure that the sales of leveraged and inverse exchange traded funds (Nontraditional ETFs) complied with applicable securities laws. FINRA found that Edward Jones registered representatives recommended nontraditional ETFs to customers without first investigating those products sufficiently to understand the features and risks of the product and that consequently these recommendations were unsuitable.
Edward Jones a Missouri limited partnership and a full-service broker-dealer since 1939. The firm’s principal offices are located in St. Louis, Missouri and the firm has more than 15,000 registered representatives and more than 10,000 branch offices throughout the United States.
As a background, Non-Traditional ETFs are usually registered unit investment trusts or open-end investment companies and are considered to be novel investment products. While ETFs came be common place in the 1990s, the first nontraditional ETFs began trading in 2006. By 2009, over 100 Non-Traditional ETFs existed in the market place with total assets of approximately $22 billion. Since 2009, the number of nontraditional ETFs on the market has since increased to more than 250.
A leveraged ETF seeks to deliver two or three times an index or benchmark return the ETF tracks. Non-Traditional ETFs can also be “inverse” or “short” meaning that the investment will return the opposite of the performance the referenced index or benchmark. Non-Traditional ETFs contain significant risks that are not associated with traditional ETFs such as daily reset, use of leverage, and compounding. Further, the performance of Non-Traditional ETFs differ significantly from the performance of the underlying index or benchmark over longer periods of time. For example, between December 2008, and April 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while a leveraged ETF that tracked the index’s daily return fell six percent. FINRA published a Notice to Members to notify brokerage firms of these additional risks and clarify a brokerage firm’s obligation when selling Non-Traditional ETFs to customers.
From January 2008, through July 2009, Edward Jones retail customers bought and sold a total of approximately $164 million worth of nontraditional ETFs. FINRA alleged that many of these sales were unsuitable because the representative recommending the investment did not have a reasonable basis for making the recommendation. Under NASD Conduct Rule 2310 before recommending a security to any customer, a broker-dealer and its registered representatives must have an “adequate and reasonable basis” for any recommendation that they make. A broker-dealer lacks a reasonable basis to recommend a security to its customers if the firm or its representatives fail to investigate the security’s characteristics sufficiently to understand the potential risks and rewards.
FINRA found that between January 1, 2008 and June 30, 2009, Edward Jones allowed its registered representatives to recommend nontraditional ETFs to customers without first conducting reasonable due diligence concerning those products. FINRA alleged that the firm did not train or adequately educate its brokers regarding nontraditional ETFs before permitting them to recommend them to customers. FINRA found that Edward Jones registered representatives placed approximately 15,000 nontraditional ETF transactions in retail customers’ accounts. In addition, FINRA alleged that Edward Jones recommended nontraditional ETFs to customers who had not indicated a desire to take aggressive risks with their Edward Jones accounts and that some customers held nontraditional ETF positions for weeks or months at a time.
The attorneys at Gana Weinstein LLP are experienced in representing investors concerning claims of unsuitable nontraditional ETF investments. Our consultations are free of charge and the firm is only compensated if you recover.