In mid-January, FINRA announced another settled disciplinary proceeding alleging unsuitable sales of levered and inverse exchange-traded funds (ETFs). This second such announcement in recent months involving non-traditional ETFs sends the clear message that FINRA continues to be intensely focused on the retail sale of complex structured products.
In the most recent consent order, FINRA alleged that between January 2009 and June 2013, certain registered representatives recommended levered and inverse ETFs to customers without fully understanding the unique features of the products. As a result, FINRA claimed that the representatives lacked “reasonable- basis” suitability for recommending the non-traditional ETFs to customers, some of whom had conservative investment objectives. Moreover, FINRA claimed that the firms lacked sufficient supervisory procedures over, and did not provide adequate training for, their representatives with respect to sales of the leveraged and inverse ETFs.
Due to the unique features of this type of product, FINRA advised its membership in a 2009 Regulatory Notice that non- traditional ETFs “typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.” FINRA’s multiple actions in this area should alert its membership that recommendations of non-traditional ETFs, and firms’ supervision and training thereof, will be closely scrutinized.