A dual-registered broker-dealer and adviser, along with certain of its employees, agreed to settle SEC charges related to recommendations to customers to purchase and hold leveraged and inverse exchange-traded funds and exchange-traded notes ("non-traditional ETFs").
According to the SEC Order, Cadaret Grant & Co., Inc. ("Cadaret Grant"), Arthur Grant (President of Cadaret Grant) and Beda Lee Johnson (Senior VP of Cadaret Grant and CCO of its broker-dealer operations)(collectively, the "supervisory respondents") failed to adequately supervise the Cadaret Grant representatives who made the recommendations that customers purchase and hold the non-traditional ETFs and structured notes. The SEC alleged that the firm assumed oil prices would rise and so recommended that customers purchase a complex structured note that offered exposure to an index composed of crude oil futures contracts. However, the SEC found that Cadaret Grant did not provide training to representatives with respect to the products, and that the brokers did not understand the risks of the exchange-traded note ("ETN") or the index it tracked. The SEC further alleged that, even though the ETN was designed to be a daily trading tool for sophisticated investors and was not supposed to be held for more than one day, Cadaret Grant representatives recommended that retail investors buy and hold positions indefinitely. Cadaret Grant's retail investors, according to the SEC, lost more than 90 percent of their investments in the notes.
Cadaret Grant, without admitting to or denying the findings, agreed to pay $500,000 along with $13,194 in disgorgement and interest. Mr. Grant and Mr. Johnson will pay penalties of $100,000 and $75,000, respectively. Mr. Long, the broker who recommended the ETN, agreed to be censured and pay a $250,000 penalty. The penalties, disgorgement and interest amounts paid will be placed in a Fair Fund for distribution to impacted investors for their incurred losses on the ETN.
In resolving the matter, the SEC acknowledged the supervisory respondents' cooperation throughout the investigation. As part of the settlement, the supervisory respondents also agreed to retain a consultant within 30 days of this Order and provide the consultant with access to files, books and records, among other things.
Commentary / Kyle DeYoung
This case, which was brought by the Enforcement Division's Complex Financial Instruments Unit, is the latest example of the SEC's focus on retail investors and the sales of sophisticated products without adequate disclosure of risks. This case is significant for the amount of financial penalties and the fact that the SEC charged the firm and three individuals, including the president and the CCO of the broker-dealer, with violations. Investment advisers and broker-dealers who recommend ETNs and other sophisticated financial products to retail investors should be on notice that their sales practices will continue to be under the regulatory microscope.
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