Financial Industry Regulatory Authority says that Century Securities Associates, Inc. and Stifel, Nicolaus & Company, Inc. must pay almost $1 million over the sale of inverse and leveraged exchange-traded funds. Stifel Financial Corporation (SF) owns both firms.
According to the SRO, for more than four years Century and Stifel recommended non-traditional ETFs that were not suitable to customers because a number of its representatives did not fully comprehend the products’ features or the risks involved. The instruments were marketed to retail investors with conservative investment goals. A number of customers ended up holding the investments for long periods and they suffered net losses.
The regulator says that Century and Stifel failed to set up proper training for their representatives and lacked the reasonable supervisory systems for the sale of these non-traditional ETFs. Instead, the firms oversaw these investments the way they did traditional ETFs. Also, they did not set up a procedure to deal with the risk for the longer-term holding periods involving these complex investments.
As part of the settlement, Stifel will pay close to $340,000 in restitution to 59 clients and a $450,000 fine. Century will pay over $136,000 to six clients and a $100,000 fine.
Leveraged and Inverse ETFs
These financial instruments “reset” every day. They are supposed to fulfill their objectives daily to allow their performance to diverge right away from that of the benchmark or underlying index. Even if there is a gain in the index’s long-term performance an investor can still sustain huge losses. The risk of loss is even bigger when the markets are volatile.
Because ETFs are complex investments it is important that they are only recommended to investors that can handle the risks that they carry. This means that firms must properly train and supervise their representatives so no unsuitable recommendations are made to customers.
FINRA Orders Stifel, Nicolaus and Century Securities to Pay Fines and Restitution Totaling More Than $1 Million for Unsuitable Sales of Leveraged and Inverse ETFs, and Related Supervisory Deficiencies, Business Wire/FINRA, January 9, 2014
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FINRA Orders J.P. Turner to Pay $707,559 in Exchange-Traded Fund Restitution to 84 Clients, Stockbroker Fraud Blog, December 10, 2013
New Hampshire Investment Adviser Focus Capital Wealth Management Accused of Elder Financial Fraud to Pay Exchange Traded Fund Victims $2.4M, Stockbroker Fraud Blog, March 14, 2013
SEC Charges Filed Against Stifel, Nicolaus & Co. and Former Sr. VP David Noack Over CDO Sales to Wisconsin School Districts, Institutional Investor Securities Blog, August 11, 2013