Subscribe to our mailing list

* indicates required







We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.


Stay Informed with the latest fanancialish news.





Citing FINRA for Flawed Regulation Over Non-Traditional ETFs

June 20, 2017

When, oh when, is FINRA going to begin sanctioning broker-dealers and their supervisory personnel, whenever a registered rep is sanctioned for recommending flagrantly unsuitable investments in customer accounts?


In its report on Disciplinary Actions for June 2017, FINRA cites sanctions against 2 registered reps who solicited, recommended and purchased for customers long-term positions in non-traditional ETFs.


FINRA Regulatory Notice 9-31 (June 2009).  In this release, FINRA issued the following advisory concerning non-traditional ETFs: 'due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance... of their underlying index or benchmark during the same period of time." Because of these risks and the inherent complexity of the products, FINRA advised B/D’s and their registered reps that non-traditional ETFs “typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets."


CASE 1 - JOHN BLAKEZUNIGA (FINRA Case #2016048453601).    Mr. Blakezuniga, who was associated with now defunct Vanguard Capital, ‘dabbled’ in inverse and inverse-leveraged ETFs (non-traditional ETFs) over a 4-5 year period. During this period, he executed some 1,280 transactions in inverse and inverse-leveraged ETFs (non-traditional ETFs) in 85 customer accounts, and maintained those non-traditional ETF positions in the customer accounts for periods ranging from about 30 days to several years.


Mr. Blakezuniga agreed to a $25K fine and a 22 month suspension to settle multiple FINRA charges: (i) he had no reasonable basis for recommending that non-traditional ETF positions be held in customer accounts beyond single trading sessions; and, (ii) he had borrowed $775,000 from 2 customers, in violation of firm policy.


CASE 2 - RICHARD MARTIN (FINRA Case #2013035817701).    Mr. Martin, who was associated with G.F. Investment Services, came to believe that the world economy was on the precipice of catastrophe and that his customers should invest in and hold non-traditional ETFs to hedge against the impending catastrophe.


Based on this view, from at least March 2011 through July 2015, Martin recommended to virtually all his customers that they invest almost exclusively in and hold for lengthy periods of time non-traditional ETFs - despite the enormous risks associated with holding non-traditional ETFs for more than one trading session. In March 2011, alone, Martin solicited and recommended to his 44 customers approximately 334 non-traditional ETF transactions in approximately 15 non-traditional ETFs.


By the end of that month, virtually all of his customers were heavily concentrated – i.e., ranging from 75% to 99% - in non-traditional ETFs. Moreover, from at least March 2011 through July 2015, Martin recommended that his customers hold those nontraditional ETFs in their accounts – which they apparently did.


Mr. Martin agreed to be barred from the industry to settle FINRA charges.


FAILURES TO HEED OBVIOUS RISKS.    In both cases, FINRA referred to warnings against holding non-traditional ETFs for more than one trading session: in ETF prospectuses, and in FINRA Regulatory Notice 09-31 (see above referenced note). Based on its findings, FINRA determined that neither Blakezuniga nor Martin had reasonable basis for recommending that non-traditional ETF positions be held in customer accounts beyond single trading sessions. And that was appropriate.


However, where were the supervisory personnel?


NO SANCTIONS AGAINST FIRMS OR SUPERVISORS.    Don't know, but this much we can say:


  • There's nothing in BrokerCheck to indicate that either firm was sanctioned for failure to adequately supervise its registered reps for unsuitable investment recommendations. Fact is, G.F. Investment Services, which has been in business since 2004, has never been disciplined for a rule infraction. [Nice going!]
  • There's nothing to indicate that any compliance officers were sanctioned: (i) at Vanguard, Christopher Hanson was the CCO, while Vincent Polivka was the Compliance Principal; and, (ii) at G.F. Investment Svcs, Daniel H. Hushek III was the CCO and Richard Martin's direct report.


FINANCIALISH TAKE AWAY.     Supervisory personnal at all broker-dealers should be conducting periodic reviews of customer statements and month-end positions so as to detect "red flag" scenarios, like undue concentratrations and unsuitable positions - e.g., long-term holdings in non-traditional ETFs. When automated reports are available, so much the better.


Yet, regardless of the methodology, such reviews are easy and straight forward - so long as the supervisor or compliance officer has a basic knowledge and understanding of potential risks - which should be spelled out in the written supervisory procedures (WSP's).


Had the firms and their supervisory personnel been conducting appropriate reviews, the suitability problems in these cases would have been detected and resolved early on.


So when is FINRA going to 'get with the program' and begin to conduct proper oversight?


These cases were reported in FINRA Disciplinary Actions for June 2017.

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016048453601 (Blakezuniga) or Case #2013035817701 (Martin).