nontraditional ETFs

Edward Jones Sanctioned Over Unsuitable Nontraditional ETF Sales

March 21, 2014 | by Staff Attorney

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.

Stifel, Nicolaus & Company and Century Securities Associates Fined by Regulator Over Leveraged ETFs

February 12, 2014 | by Staff Attorney

The Financial Industry Regulatory Authority (FINRA) ordered brokerage firms Stifel, Nicolaus & Company, Incorporated (Stifel Nicolaus) and Century Securities Associates, Inc. (Century Securities) to pay combined fines of $550,000 and nearly $475,000 in restitution to 65 customers concerning allegations of the improper sale of leveraged and inverse exchange-traded funds (ETFs). Stifel Nicolaus and Century Securities are affiliates and are both owned by Stifel Financial Corporation.

A leveraged ETF employs debt or leverage in order to increase and magnify the returns of the underlying securities. Leveraged ETFs are generally available for most investment indexes such as the S&P 500, the Dow Jones, commodities, or foreign exchanges. Many leveraged ETFs carry leverage as high as 300% leverage and will typically return 3% if the underlying index returns 1%. Leveraged ETFs can also be designed to return the inverse or opposite of the benchmark.

Leveraged ETFs are generally used and are only appropriate 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. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. Thus, even if an index is relatively flat over a period of time, a leveraged ETF may still decline in value during the same period.

Saxony Securities Fined by Securities Regulator Over Sale of Nontraditional ETFs

January 3, 2014 | by Staff Attorney

Broker-dealer Saxony Securities, Inc. (“Saxony”) was recently fined $15,000 over allegations by The Financial Industry Regulatory Authority (FINRA), the regulator of securities broker-dealers, that Saxony failed to establish and maintain a supervisory system, including written procedures, regarding the sale of leveraged or inverse exchange-traded ETFs that was reasonably designed to achieve compliance with the FINRA rules.

Saxony has been registered with FINRA since 2002. Saxony has its main offices in St. Louis, Missouri and employs approximately 100 registered representatives at the firm’s 50 branch offices.

Nontraditional ETFs are designed to return a multiple of some underlying index or benchmark such as the Dow Jones, S&P 500, or other targeted index. Some nontraditional ETFs return the inverse of that benchmark or index. These nontraditional ETFs are supposed to be held only for a one trading session – usually a single day. As a result, the performance of nontraditional ETFs over periods of time longer than a single trading session can be significantly different from the performance of their underlying index or benchmark. Accordingly, Nontraditional ETFs are inherently risky and complex products. FINRA has advised brokerage firms that nontraditional ETFs are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.

Sunset Financial Services Fined By FINRA Over Nontraditional (Leveraged) ETF Sales

October 16, 2013 | by Staff Attorney

Between March 16, 2009, and September 21, 2012, FINRA alleged that Sunset Financial Services, Inc., (Sunset) failed to establish and maintain a supervisory system regarding the sale of leveraged or inverse exchange-traded funds, otherwise known as nontraditional ETFs, that was reasonably designed to comply with NASD Conduct Rule 3010.

Sunset has its principal offices in Kansas City, Missouri and is wholly-owned by Kansas City Life Insurance Company, Inc., an insurance company. Sunset has approximately 302 branch offices, 504 registered individuals and 197 non-registered individuals associated with the firm.

FINRA alleged that Sunset’s written supervisory procedures did not address the selling of nontraditional ETFs in any fashion. A leveraged ETF employs financial debt in order to amplify the returns of an underlying stock position. Leveraged ETFs are generally available for most indexes like the S&P 500 and Nasdaq 100. For example, 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 of the benchmark.