The firm was fined $20,000 and ordered to pay restitution to two different customers.
The Sonn Law Group is investigating allegations that Ace Diversified Capital failed to supervise recommendations. If you or a family member has suffered losses investing, we want to discuss your case. Please contact us today for a free review of your case.
Ace Diversified Capital, Inc. (“Ace”) accepted and consented to findings by FINRA stating that they failed to reasonably supervise a former representative’s sale of non-traditional exchange-traded funds (“ETFs”) and exchange-traded notes (“ETNs”) to his customers.
Between July 2013 and August 2015 (the “Relevant Period”), the firm allegedly failed to establish a supervisory system, including written supervisory, reasonably designed to detect possible excessive trading or concerning approval of options accounts. By failing to do so, they violated multiple FINRA Rules.
During the Relevant Period, a former representative of Ace had three customers—OG, MS, and EO. OG was an appliance salesperson with an annual income of $85,000 and a liquid net worth of $50,000. MS was a high school teacher with an annual income of $50,000 to $100,000 and a liquid net worth of $20,000.
EO was a personal trainer with an annual income and a liquid net worth that were both in the $50,000 to $100,000 range. None of the customers had experience investing in complex securities. Each customer indicated a “moderately aggressive” risk tolerance on their new account forms.
Despite his three customers’ limited financial means, lack of sophistication, and risk tolerance, the firm permitted a former representative to recommend 65 non-traditional ETF and ETN purchases, with a total value of $262,867, for their accounts. Moreover, notwithstanding the risks associated with holding periods longer than a day, the accounts held overnight positions in these securities for an extended period of time.
For example, OG’s account had an overnight long position in the Direxion Daily Natural Gas RelatedBull 3X Shares (GASL)—a tripled-leveraged ETF—for 85 consecutive days; the accounts of MS and EO were long GASL for 94 and 122 consecutive days, respectively.
Customers OG and EO suffered $7,506 and $1,882 in losses, respectively, in connection with the non-traditional ETF/ETN recommendations. Customer MS did not suffer any losses related to his non-traditional ETF/ETN holdings.
During the Relevant Period, the firm failed to establish and maintain any supervisory system, written supervisory procedures or training to ensure the suitability of non- traditional ETF and ETN recommendations to its customers or monitor the risks associated with holding non-traditional ETFs and ETNs for extended periods of time.
Ace’s training on these products was likewise unreasonable in that its training materials were limited to a brief, one-paragraph overview of leveraged and inverse ETFs. Because of these alleged failures, the accounts of three customers were allowed to improperly hold overnight positions in non-traditional ETFs and ETNs, sometimes for months at a time.
Ace consented to the following sanctions:
- A censure;
- A fine of $20,000;
- $7,506 plus interest in restitution to customer OG;
- $1,882 plus interest in restitution to customer EO; and
- An undertaking to revise supervisory systems and written procedures to address their violations.
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The Sonn Law Group is currently investigating allegations of misconduct. We represent investors in claims against negligent brokers and brokerage firms. If you or your loved one experienced investment losses, we are here to help. For a free consultation, please call us now at 866-827-3202 or complete our contact form.