Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm Silver Oak Securities, Inc. (Silver Oak) concerning allegations from January 2009, to December 2010, Silver Oak failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws regarding the sale of leveraged and inverse Exchange-Traded Funds (Non-Traditional ETFs). Silver Oak has been a FINRA member since 2007 and is in Jackson, Tennessee, and employs 122 registered individuals at 28 branch offices.
Non-Traditional ETFs have grown significantly in popularity since 2006. By 2009, over 100 Non-Traditional ETFs had been issued with total assets under management of approximately $22 billion. 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” returning the opposite of the performance the 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.
In addition, the performance of Non-Traditional ETFs over long periods of time tend to differ significantly from the performance of the underlying index or benchmark the fund tracks. 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. Another related leveraged ETF seeking to deliver twice the inverse of the index’s daily return fell by 26 percent. These risks, among others, prompted FINRA to issue a Notice to Members clarifying brokerage firm obligations when selling Non-Traditional ETFs to customers.
FINRA alleged that Silver Oak permitted a single registered representative to recommend and sell Non-Traditional ETFs to ten customers. FINRA found that Silver Oaks did not investigate the characteristics and risk factors of Non-Traditional ETF products before allowing its representative to recommend them to customers. FINRA also alleged that the firm failed to provide its representatives any training or other guidance on whether Non-Traditional ETFs might be appropriate for customers.
Furthermore, according to FINRA, Silver Oak did not implement any procedures for supervising the purchase and trading of Non-Traditional ETFs and instead, Silver Oak relied on supervisory systems already in place. As a result, FINRA found that Silver Oak failed to implement a supervisory system tailored to Non-Traditional ETFs, did not monitor transactions involving Non- Traditional ETFs, track the volume of customers’ holdings in Non-Traditional ETFs, or track the length of time open positions were maintained in Non-Traditional ETFs.. Finally, FINRA found that the firm also did not impose any limitations on trading or holding Non- Traditional ETFs.
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.