FINRA Fines Investors Capital Corp. Over Failing to Supervise ETF Sales

shutterstock_179203760The Financial Industry Regulatory Authority (FINRA) recently fined brokerage firm Investors Capital Corp. (Investors Capital) $100,000 on allegations that from at least about June 2009 through April 2011, Investors Capital failed to provide prospectuses to customers who purchased exchange traded funds (ETFs). FINRA also alleged that Investors Capital also failed to establish, maintain and enforce an adequate supervisory system concerning the sale of ETFs and the obligation to provide ETF prospectuses to customers.

Investors Capital is an independent broker-dealer offering brokerage services and financial planning to customers and has been a FINRA member since 1992. Investors Capital is headquartered in Lynnfield, Massachusetts, and employs approximately 539 registered persons, across 325 branch offices.

ETFs typically attempt to track an index such as a market index, a commodity, or an entire market segment. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. ETFs that employ leverage are called either non-traditional ETFs or leveraged ETFs. In an ideal world, a leveraged ETF with 300% leverage will return 3% if the underlying index returns 1%. Nontraditional ETFs can also be designed to return the inverse or the opposite of the return of the benchmark.

While ETFs can be held for long term trading, leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. The performance of nontraditional ETFs held over the long term can differ drastically from the the underlying index or benchmark during the same period. FINRA has also acknowledged that leveraged ETFs are complex products that carry significant risks that are typically not suitable for retail investors.

Delivery of ETFs is prohibited unless such delivery is accompanied by a copy of a prospectus under the Securities Act. FINRA alleged that Investors Capital failed to ensure delivery of ETF prospectuses to customers. During the timer period, FINRA found that Investors Capital sold approximately 64,400 ETFs to 7,300 customers. FINRA also alleged that Investors Capital also failed to establish an adequate supervisory system concerning the sale of ETFs. FINRA found that Investors Capital had no procedures concerning the sale of ETFs or the firm’s obligations to provide prospectuses to customers. In addition, FINRA found that Investors Capital allowed its brokers to sell ETFs before completing any firm mandated training.

The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their financial losses concerning ETFs. Our consultations are free of charge and the firm is only compensated if you recover.

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