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Regulatory Sanctions

Ann Arbor, MI Affiliates Nabbed for Unsuitable Non-Traditional ETFs

June 11, 2019

by Howard Haykin


In June 2009, FINRA issued Regulatory Notice 09-31 to remind firms of their sales practice obligations relating to leveraged and inverse exchange-traded funds (ETFs). Two months later, the SEC and FINRA issued an Investor Alert to address concerns that investors - particularly buy-and-hold investors - may not understand the performance objectives and risks of these non-traditional ETFs.
Since then, FINRA has sanctioned countless numbers of broker-dealers and their registered reps for recommending that customers purchase (and oftentimes hold for extended periods) these unsuitable, non-traditional ETFs. FINRA’s most recent sanctions involved Parkland Securities and Sigma Financial Corporation, affiliated broker-dealers that are both based in Ann Arbor, Michigan. 
Parkland Securities agreed to pay a $20K fine to settle FINRA charges that it failed to establish, maintain and enforce adequate supervisory policies and procedures (including WSPs) applicable to the sales of Non-Traditional ETFs. Sigma Financial Corporation agreed to pay a $100K fine to settle similar charges.



BACKGROUNDS, RELEVANT DISCIPLINARY HISTORIES.    Parkland is a FINRA member since 2002 that has some 410 registered reps operating out of 274 branch office locations. Sigma, a FINRA member since 1983, had some 675 registered reps operating out of 394 branch office locations. In October 2014, both firms were fined and sanctioned for similarly failing to adequately supervise registered reps, and for their failures to conduct due diligence on structured products.



WHAT WENT WRONG.    From May 22, 2014 through December 31, 2016 (the "Relevant Period"):

  • 13 Parkland registered reps executed 95 transactions involving Non-Traditional ETFs in 62 retail customer accounts. The transactions had a total value exceeding $1 million and generated $7,200 in commissions, reflecting less than 1% of the Parkland's overall revenue during the Relevant Period.


  • 110 Sigma registered reps executed 1,475 transactions involving Non-Traditional ETFs in 304 retail customer accounts. The transactions had a total value exceeding $26.5 million and generated $292,000 in commissions reflecting less than 1% of Sigma's overall revenue during the Relevant Period.


While both firms had WSPs pertaining to the approval of ETFs for sale by the firm, including Non-Traditional ETFs, these procedures were not enforced. Furthermore, both firms failed to have reasonable procedures or a system in place to detect potentially unsuitable transactions involving Non-Traditional ETFs, and they had no exceptions reports or other procedures in place for reviewing the holding period of Non-Traditional ETFs.



SLOW IMPLEMENTATION OF CORRECTIVE MEASURES.    Following the conclusion of FINRA’s routine cycle exam in June 2016, both firms advised FINRA that they were implementing 2 corrective actions:

  • they would require their reps to complete training on Non-Traditional ETFs if they wished to continue selling the products; and, 
  • they would require all current holders and prospective purchasers of Non-Traditional ETFs to read and sign a disclosure statement that advised them of the risks and features of such products.


That said, the first indications of affirmative action did not take place until March 2017, when each firm issued a prohibition on the sale of Non-Traditional ETFs that seek to deliver a return of more than two-times the performance of the relevant benchmark or index.


One year later, in March 2018, both Parkland and Sigma finally responded to FINRA's concerns about extended holdings of Non-Traditional ETFs. Each stated that they had developed a process for contacting representatives (and, in some cases, customers) to ensure that extended holding periods of Non-Traditional ETFs were suitable. Despite those assurances, FINRA found that it took months for those control procedures to be fully implemented.



Given FINRA's account of how long it took for these firms to implement their corrective measures, wouldn't you be interested in knowing whether FINRA staff members looked into the possibility that retail customers may have suffered financial losses due to their prolonged holdings of Non-Traditional ETFs? Because FINRA made no mention of customer losses in these 2 case write-ups, I'm going to presume that the regulatory did not see this as a concern or issue. 



These cases were reported in FINRA Disciplinary Actions for May 2019.

For further details, click on ... FINRA Case #2016052300601 (for Parkland) and FINRA Case #2016052300602

(for Sigma).