Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Royal Securities Company (Royal Securities) concerning allegations Royal lacked adequate supervision and controls in several areas. FINRA alleged that Royal Securities failed to properly supervise two of its registered representatives, one of which utilized a unitary investment strategy for virtually all of his customers. FIRNA also found that other representative made unsuitable recommendations in three customer accounts.
FINRA alleged that between January 2010 and May 2012, representatives of Royal Securities recommended nontraditional exchange-traded funds (Non-Traditional ETFs) to customers without having a reasonable basis to do so. Further, FINRA found that Royal Securities failed to establish and maintain a supervisory system and training regarding the sale of Non-Traditional ETFs that was reasonably designed to comply with FINRA rules.
Royal Securities has been a FINRA member since September 1982 and the firm’s business lines include hedge funds, an investment advisory business, and a traditional brokerage business. Royal Securities has approximately 41 registered persons operating out of nine offices.
FIRNA alleged that in the case of registered representative with initials AM, utilized an investment approach that exclusively concentrated customers in precious metals, natural resources, commodities, and energy equities and related Non-Traditional ETFs. According to FINRA, AM recommended this investment strategy to the vast majority of his customers regardless of their varied income, net worth, age, and other relevant information. As a result, FINRA found that AM applied a unitary approach to investment recommendations thereby failing to conduct a customer-specific suitability analysis with respect to these recommendations.
In another instance, FINRA stated that in October 2008, Royal received a complaint about Royal’s representative by the initial TO. According to FINRA, TO made unsuitable recommendations to three customers from 2005 to 2008. Specifically, each of the customers had an identified investment objective of ”Growth”, which the Royal Securities defined as having investments in high quality equity, large cap funds, a balanced portfolio of investment grade growth stocks with smaller positions in high grade corporate bonds. Notwithstanding this definition, FINRA found that TO invested these customers in low-priced securities and/or speculative securities resulting in substantial losses in the accounts. In addition, FINRA found that for two customers their accounts had excessive concentrations of low priced securities, 23% and 28%, respectively. FINRA found that Royal Securities failed to monitor TO’s recommendations for customer-specific suitability and failed to monitor the customers’ activities for over concentration
FINRA also sanctioned Royal Securities over the firm’s Non-Traditional ETFs practices. Non-Traditional ETFs have gained popularity since 2006. Leveraged ETFs seek to deliver multiples an index or benchmark that the ETF tracks. Non-Traditional ETFs can also be setup to be “inverse” or “short” funds that return the opposite performance of the index or benchmark. Non-Traditional ETFs can also be both inverse and leveraged thereby returning a multiple of the inverse performance of an index or benchmark. Non-Traditional ETFs contain significant risks that are not found in traditional ETFs. Non-Traditional ETFs have risks associated with a daily reset, use of leverage, and compounding. The performance of Non-Traditional ETFs can differ significantly from the performance of the underlying index or benchmark it tracks over long periods of time.
FINRA found that from January 2010, through May 31, 2012 Royal Securities representatives engaged in at least 245 purchases and sales in Non-Traditional ETFs in the amount of approximately $4.752 million. According to FINRA, many of the holding periods for the Non-Traditional ETFs were for periods longer than six months and in some instances up to two years. FINRA found that Royal Securities allowed this to happen despite the products’ prospectuses that stated that Non-Traditional ETFs are not intended to be held longer than one trading session.
FINRA found that representative AM was one of Royal Securities representatives most heavily involved in trading Non-Traditional ETFs and AM lacked of understanding of the basic features of the products. FINRA found that Royal Securities did not require that its representatives to complete any product training before being allowed to recommend Non-Traditional ETF to customers. As a result, FINRA alleged that Royal Securities’ representatives who recommended and sold Non-Traditional ETF products to customers lacked an adequate understanding of the features and risks of the products and lacked a reasonable basis to believe that the products were suitable for customers.
The attorneys at Gana Weinstein LLP are experienced in investigating claims concerning the sale of leverage or nontraditional ETFs. Our consultations are free of charge and the firm is only compensated if you recover.