According to FINRA AWC letter number 2013035131702, accepted by FINRA in April 2017, Garden State Securities failed 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”), a violation of FINRA Rule 2010.
This allegation follows a trend of recent FINRA disciplinary actions involving leveraged exchange traded funds. These are complex products that have been largely misunderstood by financial representatives, frequently resulting in substantial customer investment losses.
Overview of FINRA Rule Violating Conduct Related to Non-Traditional ETFs by Garden State Securities
Non-Traditional ETFs are designed to return a multiple of an underlying index or benchmark, the inverse of that benchmark, or both, over only the course of one trading session-usually a single day. As a result, the performance ofNonTraditional ETFs over periods of time longer than a single trading session “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 these products, FINRA has advised broker-dealers and their representatives that Non-Traditional ETFs “are typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”
During the period from July 2011 to June 2012, more than a dozen GSS representatives sold Non-Traditional ETFs to customers, many of whom held these products for periods longer than one trading session. However, during this period, the Firm had no WSPs that specifically addressed the suitability or supervision ofNon-Traditional ETFs.
In addition, GSS did not have a system that enabled the Firm’s supervisory personnel to adequately review Non-Traditional ETF transactions to ensure their suitability. The Firm relied on supervisory staff to conduct a manual blotter review to detect potentially unsuitable Non-Traditional ETF transactions
However, this manual blotter review was an inadequate means of reviewing Non Traditional ETF trades. In fact, the Firm’s blotter did not even differentiate between traditional and Non-Traditional ETFs.
If you’ve invested and lost money because of unsuitable investments in ETFs recommended by your advisor at Garden State Securities, the securities fraud attorneys at the Sonn Law Group are interested in hearing from you. We invite you to contact us online to schedule a free review of your case.