FINRA ordered Stifel, Nicolaus and Century Securities Associates to pay fines and restitution totaling more than $1 million for allowing its advisors to make unsuitable recommendations of two types of highly risky ETFs to clients, and for failing to train and supervise its advisors on the complexities of the two funds.
FINRA alleged that between January 2009 and June 2013, advisors recommended leveraged and inverse ETFs, two products that, FINRA determined, the advisors did not understand.
According to FINRAs press release on the fines, it also found that Stifel and Century did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Instead, Stifel and Century supervised transactions in these two fund types in the same manner that they supervised traditional ETFs. Neither firm had a procedure to address the risk associated with longer-term holding periods in the products. Further, both firms failed to ensure that their registered representatives and supervisory personnel obtained adequate formal training on the products before recommending them to customers.
Although neither firm admitted to any wrongdoing, Stifel agreed to pay a $450,000 fine and $340,000 in restitution to 59 customers and Century Securities will pay a $100,000 fine and $136,000 in restitution to six customers.
An inverse ETF is designed to produce the opposite return of the index to which it is pegged. In this way, the inverse ETF functions as a short of the entire index. Leveraged ETFs use financial derivatives and debt to boost the returns of an underlying index.
The two firms are affiliates of Stifel Financial Corp. and are based in St. Louis.
This is not the largest fine issued by FINRA for selling these types of products. In May 2012, four firms Wells Fargo, Citigroup, Morgan Stanley and UBS paid $9.1 million in fines and restitution for selling leveraged and inverse ETFs.