Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) has sanctioned Infinex Investments, Inc. (Infinex Investments) concerning allegations that from April 2009, through March 2011, Infinex Investments permitted 35 registered representatives who received minimal training on inverse and inverse-leveraged Exchange-Traded Funds (Non-Traditional ETFs) to sell them to customers. FINRA alleged that the firm and brokers failed to perform reasonable due diligence to understand the risks and features of the product necessary in order to recommend 229 customers approximately 835 transactions in these products. In addition, FINRA also found that some of the recommendations were also unsuitable on a customer specific basis. Finally, FINRA also found that Infincx Investments also failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable FINRA rules relating to the sale of Non- Traditional ETFs.
Infinex Investments has been a FINRA firm since 1994, is a full service broker-dealer with its primary business being the retail sale of mutual funds and variable annuities. The firm employs approximately 400 registered representatives located in approximately 500 branches.
As a background, ETFs attempt to track a market index. ETFs can be either attempt to track the index or apply leverage in order to amplify the returns of an underlying stock position. A leveraged ETF with 300% leverage will attempt to 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. Leveraged ETFs are generally used only for short term trading. The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and are designed to achieve their stated objectives on a daily basis. In addition to the risks of leverage the performance of Non-Traditional ETFs held over the long term can differ drastically from 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.
The two primary Non-Traditional ETFs that FINRA alleged that Infinex Investment sold during the time period were inverse-leveraged funds one of which sought returns inverse to the performance of the 20+Year Treasury Fund and the other sought returns inverse to the performance of the S&P 500 Index Fund. The prospectuses for both of these funds highlighted the significant risks associated with holding the investments, their short-term nature, their leverage, and that investors would lose money if their relative benchmark indices stayed flat or rose.
Nonetheless, FINRA alleged Infinex Investments permitted 35 representatives, including two brokers referred to by the initials “JT” and “JO”, to recommend to 229 customers approximately 835 transactions in Non-Traditional ETFs. FINRA also found that the brokers failed to employ reasonable diligence regarding Non-Traditional ETFs or to establish appropriate training and supervision protocols. FINRA concluded that on these grounds the recommendations lacked a reasonable basis.
In addition, FINRA found that 165 of the 835 Non-Traditional ETF purchases were also unsuitable under a customer-specific suitability analysis because the recommendations were made to 87 customers with conservative investment objectives and/or risk tolerances. Several of these customers were also elderly, retired customers, or maintained 1RA retirement accounts according to FINRA. Finally, 143 purchased Non-Traditional ETFs were maintained in customer accounts for longer than seven business days.
The attorneys at Gana Weinstein LLP are experienced in representing investors to recover their investment losses due to unsuitable investments such as Non-Traditional ETFs. Our consultations are free of charge and the firm is only compensated if you recover.