A broker-dealer settled FINRA charges for suitability violations, and related supervisory failures, as to the sale of non-traditional exchange traded funds and complex options positions to retail investors.
FINRA charged the broker-dealer with failing to develop appropriate oversight procedures for sales of non-traditional exchange trade products. FINRA previously warned broker-dealers that non-traditional ETFs, which return a multiple of an index or benchmark, "typically are not suitable for retail investors who plan to hold them for more than one trading session. . . ." (See FINRA Notice 09-31.) In the present case, the firm had no procedures to identify non-traditional ETFs or to monitor customers' holding periods. As a result, two senior customers held the products for multiple years.
Separately, FINRA found that the firm failed to supervise a representative offering complex options trading to customers. FINRA determined that a firm representative recommended trades with, in some cases, a maximum potential loss nine times higher than maximum potential gain, and in other cases, with an assured loss.
FINRA determined that the conduct violated Rules 3110 ("Supervision"), 2360(b)(20)(C) ("Options - Headquarter Review of Accounts") and 2010 ("Standards - Commercial Honor"), as well as NASD Rule 3010. To settle the charges, the broker-dealer agreed to (i) a sanction, (ii) a $35,000 fine and (iii) certification to FINRA of revised policies remedying the supervisory failures within 60 days.
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