FINRA sanctioned a broker-dealer for (i) selling leveraged, inverse and inverse-leveraged exchange-traded funds ("non-traditional ETFs") to retail customers that did not meet the firm's stated suitability criteria, and (ii) recommending non-traditional ETFs that were unsuitable.
FINRA stated that the firm had instituted policies concerning sales practice obligations for exchange-traded funds ("ETFs"), but had failed to enforce these policies reasonably. Additionally, FINRA found that the firm failed to establish an adequate supervisory system for monitoring the holding periods of non-traditional ETFs, and also failed to conduct adequate diligence with respect to the risks and features of the non-traditional ETFs relative to the tolerance of retail customers to whom they were recommended.
FINRA found that the firm violated NASD Rules 2310 and 3010, and FINRA Rules 2010 and 2111. FINRA fined the firm $2.25 million and ordered it to pay restitution of more than $716,000 to affected customers.
Commentary
When firms fail to live up to their own compliance procedures, their ensuing discussions with regulators are often not about guilt or innocence; they are about monetary penalties. Each business should review its self-imposed compliance obligations periodically and be confident that they are satisfied.
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