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Regulatory Sanctions

FINRA ‘Double Stuf’ Sanctions Over Sales of Unsuitable Non-Traditional ETFs

July 31, 2017

by Howard Haykin


Now this is more of what we’re looking for. We start out by reporting on FINRA sanctions against a broker who crammed unsuitable short-term trading vehicles into customer accounts. We conclude with FINRA sanctions against the broker-dealer, Oppenheimer, for having failed to supervise its brokers on these transactions. What a relief! Read on for the “Double Stuf” sanctions.


Edward McFarlane, a General Securities Rep, agreed to a $5K fine and a 2-month suspension to settle FINRA charges that he recommended and effected unsuitable transactions involving inverse, leveraged, and inverse-leveraged exchange-traded funds (non-traditional ETFs) in customer accounts.


BACKGROUND.    McFarlane, a resident of Glenside, PA, first became registered in 1997 as an Investment Company/Variable Contracts Representative. From September 2008 to February 2017, McFarlane was registered in this capacity and as a General Securities Representative through Oppenheimer & Co. He currently is registered in these capacities through another FINRA member firm. He had no formal disciplinary history.


FINRA FINDINGS.    Between December 2010 and June 2012, McFarlane recommended and effected approximately 169 unsuitable transactions involving inverse, leveraged, and inverse-leveraged ETFs in the accounts of a customer. The Non-Traditional ETFs that McFarlane recommended were unsuitable, given the customer's financial situation, conservative investment objectives and minimal tolerance for risk. Furthermore, McFarlane held the Non-Traditional ETFs in the customer's accounts for as long as 470 days with an average holding period of 40 days – even though these securities were short-term trading vehicles not meant to be held for extended periods.


As a result, the customer suffered total losses that exceeded $48,000. McFarlane’s member firm paid restitution to the customer for these losses.Such transactions would violate NASD Rule 2310 (Recommendations to Customers – Suitability).


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

For details on this case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016050393901.


FINANCIALISH TAKE AWAY.    Once again, I find myself reporting on a case that “smacks of failure to supervise” by a broker-dealer and its supervisory personnel. But unlike many earlier cases, FINRA fulfilled my expectations by having handed down sanctions to the offending broker-dealer.


I sifted through the CRD records for Oppenheimer & Co. and found that FINRA had, in fact, fined and sanctioned the firm for its failure to “establish, maintain and enforce a reasonably-designed supervisory system and written supervisory procedures ("WSPs") regarding the sales of leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“’Non-Traditional ETFs").  Oppenheimer & Co. ending up paying a $2,250,000 fine and $717,000 in restitution to settle FINRA charges. Here are the details:


From 8/4/09 to 9/30/13, Oppenheimer failed to establish, maintain and enforce a reasonably-designed supervisory system and WSPs regarding the sales of Non-Traditional ETFs. Among other things, Oppenheimer allowed its representatives to recommend Non-Traditional ETFs: “(1) without performing reasonable diligence to understand the risks and features associated with them, and (2) that were unsuitable for certain customers based on their age, investment objectives and financial situation.”


For details on the Oppenheimer case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2013038180801.