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Articles Posted in ETFs

The Financial Industry Regulatory Authority (FINRA) announced plans to file enforcement actions against certain brokerages in connection with unsuitable sales of leveraged and inverse leveraged exchange-traded funds (ETFs), as well as for failure to train their brokers who sell them (see Reuters article by Suzanne Barlyn and Jessica Toonkel entitled “FINRA to bring cases over leveraged, inverse ETFs”). The article cites former FINRA Enforcement Chief Bradley Bennett as the source of this information, and notes that he refused to identify the broker-dealers that FINRA plans to sue.

Bennett reportedly told lawyers at a Practising Law Institute (PLI) seminar in New York that the enforcement actions will “make statements” about how broker-dealers should ensure that registered representatives are properly trained about these complex products and the types of customers for whom they may or may not be suitable. Continue Reading

The SEC and FINRA are finally stepping up to regulate nontraditional ETFs and ETNs and to ensure that these complicated products are not sold to unsophisticated investors.

Citigroup Global Markets Inc., Morgan Stanley, UBS Financial Services Inc. and Wells Fargo agreed to pay $9.1 million to settle allegations that they sold leveraged and inverse exchange-traded funds to clients who had no business investing in the complex instruments. Continue Reading

William Stafford Thurmond of El Paso, Texas submitted a Letter of Acceptance, Waiver and Consent (AWC) to the Financial Industry Regulatory Authority (FINRA) in which he has been fined and suspended  for allegedly making unsuitable recommendations and unauthorized transactions in violation of NASD Rule 2310 and FINRA Rules 2111, 4511, and 2010.

From October 1997 until his termination in November 2016, William Stafford Thurmond was registered with EDI Financial as a general securities representative and general securities principal. According to FINRA’s findings, Thurmond recommended unsuitable transactions and executed various unauthorized trades in a customer’s account totaling approximately $328,000. The findings stated that Mr. Thurmond placed eighteen trades without obtaining authorization or approval from the customer or his power of attorney. FINRA also stated that the customer’s desire was to achieve higher returns than he would receive in a savings account, but wanted limited risk to his principal. Instead, the account held the leveraged and inverse leveraged ETFs for an average of over 150 days, which exceeded the recommendations in the ETFs’ prospectuses and FINRA’s NTM 09-31. In addition, Thurmond  received  $42,724 in commissions from the unsuitable recommendations and caused the customer to generate losses of $212,731.00. Continue Reading

Michael Thomas Lee of Darien, Connecticut submitted a Letter of Acceptance, Waiver and Consent (AWC) to the Financial Industry Regulatory Authority (FINRA) in which he has been fined and suspended for allegedly engaging in an outside business activity in violation of FINRA Rules 3270 and 2010.

From June 2014 until February 2017, Michael Thomas Lee was registered with Kestra Investment Services (Kestra) as a General Securities Representative. According to the FINRA findings, Lee engaged in an outside business activity known as the Origin Fund, a prospective ETF fund, without notice or approval from his firm. The findings stated that Lee allegedly solicited  potential investors and distributed written materials prepared by his business partner using his personal e-mail and an e-mail address associated with the fund. FINRA stated that although none of the individuals invested in the fund, the materials falsely represented that the Origin Fund was a hybrid registered investment advisor with $20 million in assets and that Kestra was sponsoring and providing services to the fund. In addition to those FINRA findings, Lee allegedly falsely attested his use of an undisclosed email address to conduct securities business on two annual compliance questionnaires. Continue Reading

Jay Dee Jordan, a former registered representative with WFG Investments, Inc. submitted a Letter of Acceptance, Waiver and Consent (AWC) in which he was barred by the Financial Industry Regulatory Authority (FINRA) for recommending and executing hundreds of unsuitable non-traditional exchange traded fund (ETF) purchases in his customers’ accounts.  FINRA found that Mr. Jordan’s unsuitable recommendations and ETF purchases resulted in his clients’ accounts sustaining realized and unrealized losses of more than $8.4 million.

FINRA found that Jay Dee Jordan, of Oklahoma City, Oklahoma, recommended that his clients purchase over $22 million in non-traditional ETFs. Of the 84 accounts in which Mr. Jordan recommended the  non-traditional ETFs, 79 of these accounts held ETF positions for longer than thirty days, and on numerous occasions, the ETF positions were held for years.  According to FINRA, Mr. Jordan routinely failed to sell these complex products on the same day he purchased them and did not have a reasonable basis to believe that his long-term buy-and-hold recommendations were suitable for his customers.  Continue Reading

FSC Securities Corporation has been censured and fined $100,000 and ordered to pay restitution to affected customers of over $492,485.33 for failing to supervise the unsuitable sales of leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs).

The Financial Industry Regulatory Authority (FINRA) found that FSC Securities, which is headquartered in Atlanta, Georgia, failed to establish and maintain an adequate supervisory system to ensure the suitability of its sales of non-traditional ETFs.  According to FINRA, FSC Securities executed approximately 6,500 purchases of the non-traditional ETFs, which were worth approximately $92 million and generated roughly $603,000 in commissions.   Continue Reading

Daniel Hushek, a Registered Principal with G.F. Investment Services, LLC, submitted a Letter of Acceptance, Waiver and Consent (AWC) in which he was fined and suspended by the Financial Industry Regulatory Authority (FINRA) for failing to adequately supervise the unsuitable exchange traded fund (ETF) recommendations and transactions of a registered representative under his supervision.  As a result, the representative’s recommendations and trades caused losses of more than $2.4 million in customers’ accounts.

According to FINRA, Daniel Joseph Hushek III, of Bradenton, Florida, failed to adequately supervise or respond to red flags in connection with a registered representative of his member firm who recommended and engaged in unsuitable trading in 44 customer accounts (belonging to 41 customers).  FINRA found that from March 2011 through July 2015, the registered representative under Mr. Hushek’s supervision recommended his customers invest almost exclusively in and hold for lengthy time periods non-traditional ETFs, despite the “enormous risks” associated with holding these complex products. FINRA stated that as a result of this employee’s misconduct, customers incurred realized and unrealized losses of over $2.4 million. Continue Reading

Edward McFarlane, a registered representative formerly employed with Oppenheimer & Co. Oppenheimer), submitted a Letter of Acceptance, Waiver, and Consent (AWC), in which he consented to, but did not admit to or deny, the Financial Industry Regulatory Authority’s (FINRA) findings that he recommended and effected unsuitable ETF recommendations in his customer’s account, resulting in losses to his customer of approximately $48,524.79.

Edward Thomas McFarlane, of Glenside, Pennsylvania, allegedly recommended and effected approximately 169 transactions involving inverse, leveraged, and inverse-leveraged exchange-traded funds (ETFs).  FINRA found that Mr. McFarlane recommended that the non-traditional ETFs be held in his customer’s account for as long as 470 days, with an average holding time of 40 days.  The ETFs recommended by Mr. McFarlane were intended to be short-term trading vehicles and not meant to be long-term investments.  Continue Reading

Richard William Lunn Martin, a former registered representative with GF Investment Services, LLC, submitted an Offer of Settlement in which he was barred by the Financial Industry Regulatory Authority’s (FINRA) due to findings that he made unsuitable ETF hold recommendations which resulted in losses to his customers of approximately $2.4 million.

Richard William Lunn Martin, of Johor, Malaysia, allegedly solicited, purchased and recommended his customers hold non-traditional ETFs in their accounts for years – an unsuitable recommendation for any customer.  Non-traditional ETFs are typically designed to achieve their objectives over the course of one trading session, i.e., one day.  In fact, FINRA Regulatory Notice 09-31 advises broker dealers and their registered representatives that non-traditional ETFs “are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”  Continue Reading

John Amador Blakezuniga, a former registered representative with Vanguard Capital, submitted a Letter of Acceptance, Waiver, and Consent (AWC), in which he consented to, but did not admit to or deny, the Financial Industry Regulatory Authority’s (FINRA) findings that he made unsuitable ETF recommendations in 85 of his customers’ accounts.

John Amador Blakezuniga, of Gurabo, Puerto Rico (a/k/a John Anthony Blake and John A Zuniga), allegedly recommended approximately 1,280 transactions in inverse and inverse-leveraged ETFs.  Mr. Blakezuniga recommended that the non-traditional ETFs be held in his customers’ accounts for periods ranging from 30 days to several years, despite the warning in the prospectuses that “investment results for a single day only, not for longer periods.”  The ETFs allegedly recommended by Blakezuniga were intended to be short-term trading vehicles and were not meant to be long-term investments.  Continue Reading

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