Firm Fined $20K for Inadequate Policies & Training

In this month’s FINRA Disciplinary Actions Notice, a firm from Red Bank, New Jersey was censured, fined $20,000, and required to review and revise, as necessary, its systems, policies and procedures (written and otherwise) and training with respect to the sale of leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs).

Without admitting or denying the findings, the firm consented to the sanctions and to the entry of findings that it failed to establish, maintain, and enforce a supervisory system and WSPs reasonably designed to supervise representatives’ sales of non-traditional ETFs. The findings stated that the firm did not have any procedures addressing non-traditional ETFs.

The firm added a section to its WSPs that included a general description of ETFs that mentioned some of the risks inherent in non-traditional ETFs, including that the performance of these products “can differ significantly from the underlying index or benchmark during the same time period.” However, this new section did not provide any guidance to the firm’s supervisors regarding how they should supervise non-traditional ETFs in light of the unique features and risks inherent in these products.

The findings also included that the firm failed to provide non-traditional ETF training to representatives and their supervisors. The firm did not include the topic of non-traditional ETFs at its annual compliance meetings, continuing education programs or in any other type of firm training. In addition, the firm did not require its representatives to complete product-specific training on non-traditional ETFs before recommending them to customers.

The findings also stated that the firm did not have an adequate system for the review of non-traditional ETF transactions to ensure their suitability. The firm did not have any exception reports specific to non-traditional ETFs and did not have an automated method of monitoring non-traditional ETF holding periods. The firm did not require supervisors to review open positions in non-traditional ETFs held for extended periods or resulting in unrealized losses; nor did the firm impose any limitations on trading or holding nontraditional ETFs.

To view the complete disciplinary actions notice, click here.

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