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Regulatory Sanctions

Broker Barred Over Non-Traditional ETFs – His Firm Gets Off Scot-Free

December 5, 2017

by Howard Haykin


Few things frustrate me more than to see FINRA give a ‘free pass’ to firms that failed to adequately supervise their “out-of-control” brokers. In such scenarios, defenseless customers - often elderly and/or unsophisticated in finance - are fully exposed to the risk of significant losses. In the case below, FINRA may have had valid reasons for not sanctioning WFG Investments for its supervisory deficiencies related to broker Jay Jordan. However, FINRA offers little, if any, explanation - and now would be a good time for the regulator to share one with the broker-dealer community.


Jay Jordan agreed to be barred from the industry to settle FINRA charges that he recommended and executed hundreds of unsuitable purchases of Non-Traditional ETFs in his customers’ accounts.


BACKGROUND.    Jordan, a resident of Oklahoma City, OK, had been with WFG Investments from 2005 through March 2016. In terminating Jordan, WFG noted in Form U5 that it “has reasonably concluded the representative failed to follow certain policies of WFG, including: failure to report a customer complaint, attempting to settle a customer complaint, unauthorized use of a personal email address to communicate with a customer, and mischaracterizing aspects of an outside business activity.” 


[Financialish: It’s interesting to note that WFG’s termination notice (Form U5) mentions nothing about the unsuitable transactions that Jordan effected in his customers’ accounts. This “silence” speaks volumes – as discussed in ‘FINANCIALISH TAKE AWAYS’, below.]


And, for the record, Jordan had no prior disciplinary actions, though his BrokerCheck file sports 10 pending customer disputes.


FINRA FINDINGS.    Between June 2012 and March 2016 (the “Relevant Period”), Jordan engaged in a series of significant violations of FINRA rules that resulted in substantial customer harm. These violations resulted from the following misconduct:


  • He recommended and engaged in unsuitable trading in Non-Traditional ETFs in 84 of his customers’ accounts.
  • These trades, unsuitable from both a reasonable-basis and a customer-specific perspective, collectively resulted in customer losses exceeding $8 million.
  • He exercised unauthorized discretion – i.e., without having obtained prior written authorization in the accounts of at least 6 customers.
  • He mismarked 927 of his customers' purchases of nontraditional ETFs as "unsolicited" when he had, in fact, solicited those transactions.
  • He failed to report 2 customer complaints to his Firm, and then surreptitiously attempted to settle one of the claims away from the Firm through the improper use of his personal email account.
  • He failed to produce requested documents and information pursuant to a FINRA information request.


THE DETAILS.    Prior to June 2012, the start of the Relevant Period, Jordan's business partner, “MW," was primarily responsible for making asset allocation recommendations to Jordan's customers. In June 2012, MW resigned, and Jordan became solely responsible for making investment recommendations to his customers. This change in circumstances and dynamics coincided with Jordan’s new-found conviction that an economic crisis and/or stock market collapse was imminent - which convinced him to load up his customers' portfolios with various Non-Traditional ETFs that tracked (on a highly-leveraged basis) indexes that were pegged to such things as oil and gas prices, U.S. Treasury rates, and S&P 500 stock prices.


Jordan effected transactions in Non-Traditional ETFs in 84 of the 153 accounts for which he was the assigned registered rep. In total, Jordan recommended that his clients purchase more than $22 million in Non-Traditional ETFs during the Relevant Time Period. Jordan routinely failed to sell these products on the same day he purchased them [which is a common strategy for these trading vehicles - see "Non-Traditional ETFs: A Primer"], and he failed to conduct a daily analysis to ascertain whether it was appropriate to hold the products for an extended period of time.


Ultimately, Jordan's unsuitable recommendations in Non-Traditional ETFs in 79 client accounts resulted in realized and unrealized customer losses exceeding $8.4 million for positions held longer than 30 days – and on many occasions these positions were held for years. Meanwhile, Jordan and WFG received gross commissions of approximately $810,000 from Non-Traditional ETF transactions.


Because he failed to do reasonable diligence to understand the attributes and risks of Non-Traditional ETFs, Jordan did not have a reasonable basis to believe that the recommendations to purchase the Non-Traditional ETFs were suitable for any investor, nor did he have a reasonable basis to believe that his long-term buy-and-hold recommendations were suitable.


Jordan also failed to conduct an adequate customer-specific suitability analysis with respect to the purchase and sale of Non-Traditional ETFs on behalf of many of his customers. For example:

  • 41 of his customer accounts had limited investment experience;
  • 31 of his customer accounts had moderate, moderate/conservative, or conservative risk tolerances; and,
  • 10 of his customer accounts listed preservation of capital as a primary or secondary investment objective.


FINANCIALISH TAKE AWAYS.    Those were FINRA's findings - at to some extent, Financialish concurs - i.e., Jay Jordan was a menace to his customers and his firm and, therefore, deserved to be barred from the industry. Where we differ is FINRA's take on the broker-dealer, namely that:

  • WFG Investments deserved significant sanctions for its failure to have in place basic, adequate supervisory procedures to protect its customers from the risks presented by Jay Jordan, a renegade broker.
  • FINRA deserved to be reprimanded for having failed to recognize the firm’s culpability in this case.


WFG Investments, the firm with which Jordan was associated, has been a FINRA member since 1988. The Dallas, TX-based firm conducts a general securities business, with around 237 registered persons who operate out of 118 branch offices. WFG Investments is owned by the Williams Financial Group which, in turn, is owned by Wilson Henry Williams (Chairman and CEO of WFG Investments) and David Wilson Williams (President and Chief Compliance Officer of WFG Investments) through various Williams Family legal entities.


At no point in time did FINRA hold WFG Investment or its supervisory personnel responsible for any failure to supervise Jordan. Instead, FINRA, as it's prone to do, let a broker “hang out to dry” on charges he loaded up his customers’ accounts with volatile Non-Traditional ETFs. AS IF JORDAN OPERATED WITHIN A VACUUM.


How many red flags should it have taken WFG Investments to call out Jordan for his inappropriate and unsuitable investment strategies?


Why does FINRA hold WFG Investments harmless when it obviously failed to adequately supervise Jordan's "scorched earth" investment strategy?


Why does FINRA not sanction WFG Investments for its failure, in February 2013, to adequately implement new supervisory procedures for Non-Traditional ETFs? Instead, FINRA uses these procedures to further buttress its case against Jay Jordan.


Here's what FINRA wrote in Jordan's AWC Letter:


"In February 2013, WFG implemented a new written supervisory procedure ("WSP") that incorporated the guidance in Notice to Members 09-31 and required, among other things, that registered representatives have an "adequate knowledge ofthe product being offered" and obtain a signed risk disclosure form for each customer seeking to trade in nontraditional ETFs. WFG distributed this new policy to all of its registered representatives, including Jordan.

Despite this new policy, Jordan escalated his recommendations that customers purchase and hold nontraditional ETFs for extended periods of time throughout 2013, as he became increasingly convinced that an economic collapse was imminent. He also failed on numerous occasions to obtain the required signed risk disclosure form from his customers. 


Last time I looked, WSPs were supposed to lay out detailed steps for supervisory personnel to take when supervising a firm's business activities - and not necessarily those steps expected of its brokers or registered reps. Furthermore, those WSPs should clearly detail ... (i) which supervisory persons are responsible; (ii) what steps they are to take; (iii) when they are to conduct such procedures; (iv) how they are to evidence completion of their supervision; and, (v) what investigatory steps were taken to address and resolve noted exceptions.


Perhaps FINRA should have made the case that WFG Investments and its CCO, David Wilson Williams, erred - at least just this once.


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2015046728802.