FINRA Fines Stifel-Owned Broker-Dealers $550,000

FINRA Fines Stifel-Owned Broker-Dealers $550,000

The Financial Industry Regulatory Authority (FINRA) has ordered Broker dealers Stifel, Nicolaus & Company Inc. and Century Securities Associates Inc. (both owned by Stifel Financial) to pay a combined $550,000 in fines and $475,000 in restitution to 65 customers who were sold leveraged and inverse exchange-traded funds (ETFs) that did not meet their investment goals on the recommendation of representatives who did not understand how the financial products actually worked, the regulatory body announced in a press release.

“The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers. Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors,” said FINRA chief of enforcement Brad Bennett.

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Leveraged, inverse ETFs have different risks than traditional ETFs

Leveraged and inverse ETFs don’t necessarily track their underlying index, and are not usually suitable for investors with conservative goals. A number of customers lost money on the ETFs, which is not illegal by itself, but not only did sales representatives not fully understand the products they were recommending, FINRA found Stifel’s supervisory systems and formal training to be inadequate. Instead, the two companies used the same procedures to deal with inverse and leveraged ETFs as they use with traditional ETFs even though the risks associated with each is very different.

Neither company has admitted to any wrongdoing as part of the settlement.

FINRA criticized for expunging complaints from record

This deal comes a few weeks after US Senators Chuck Grassley (R-Iowa) and Jack Reed (D-R.I.) called on FINRA CEO Richard Ketchum to explain why 96.9% of all investor complaints had been expunged from public records, preventing investors from getting the access they need when doing due diligence, so it wouldn’t be surprising to see a few more cases given a higher profile to start off the year.

In a similar vein, FINRA said last week that it would go after stockbrokers with a long record of complaints, even if they have moved from firm to firm, to stamp out a practice it calls ‘cockroaching,’ reports Scott Patterson for The Wall Street Journal.

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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