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Regulatory Sanctions

Another Broker-Dealer Sanctioned for Sales of Non-Traditional ETFs

October 19, 2017

by Howard Haykin


Coastal Equities agreed to a $15K fine to settle FINRA charges that it failed to establish, maintain, and enforce a reasonably designed supervisory system for sales of leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) by its registered reps.


BACKGROUND.    Wilmington, DE-based Coastal has been a FINRA member since 1989. The Firm, which has some 40 office and 90 registered personnel, has no relevant disciplinary history.


FINRA FINDINGS.    Over a one-year period, from October 2013 to September 2014, Coastal failed to establish. maintain, and enforce a reasonably-designed supervisory system for its reps’ sales of Non-Traditional ETFs. During that extended period, Coastal reps sold Non-Traditional ETFs to customers. many of whom held these products for longer than one trading session.


Where did Coastal go wrong?


  • The Firm could not demonstrate – i.e., provide evidence - that it had:

►   conducted due diligence on each new product sold to customers to ensure that the firm and its reps understood the nature of the product and its potential risks and rewards;
►   determined, on an ongoing basis, whether the specific product was performing as anticipated, whether market conditions had affected performance, and whether only authorized and suitably trained reps were selling the product.


  • Coastal did not require its registered reps to collect a signed ''qualification agreement" from each customer prior to executing any Non-Traditional ETF transaction for that customer.

►   that agreement would describe product features and risks, and memorialize the customer’s acknowledgement of acceptance of the risks.


  • Coastal had no exception reports specific to Non-Traditional ETFs and failed to implement a system to monitor Non-Traditional ETF holding periods and losses,


FINANCIALISH TAKE AWAYS.    While the alleged violations in this case date back to 2013 and 2014, non-traditional ETFs remains a significant concern to FINRA. In its Regulatory and Examination Priorities Letter for 2017, FINRA cites “instances where firms recommend products that are unsuitable for customers, including situations where customers and sometimes registered representatives do not understand important product features.”


With particular frequency, such transactions involve “complex or novel exchange-traded products (ETPs), structured retail products, leveraged and inverse exchange-traded funds, non-traded real estate investment trusts (REITs) and unlisted business development corporations (BDCs).”


Based on the fact that Coastal was fined “only” $15,000, it would appear that Non-Traditional ETFs were not a widespread sales issue at this firm. That said, any level of customer transactions in these speculative investments will appear as “red flags” to FINRA examiners. Therefore, firms are cautioned to remain vigilant and sensitive when dealing with these securiteis – particularly as it pertains to suitability for senior customers.


This case was reported in FINRA Disciplinary Actions for August 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2014041310602.