FINRA issued a Letter of Acceptance, Waiver and Consent against Suntrust Investment Services, Inc. in May of 2020 related to the recommendation and failure to supervise non-traditional ETFs to customers.
Non Traditional ETFs include ETFs designed to, on a daily basis, return a multiple of an underlying index or benchmark, or the inverse of the return of an underlying index or benchmark. Because these products are often meant as a day trading vehicle, and are reset daily, their performance over longer lengths of time may differ significantly from the performance of the index or benchmark.
These risks were set out by FINRA a decade ago in Regulatory Notice 09-31 which discussed the fact that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.” FINRA further has required member Broker-Dealers to have supervisory systems in place to ensure compliance with industry Rules, and importantly customer specific suitability under Rule 2111.
The AWC against Suntrust (here) stated as follows with regard to failures to supervise:
“During the Relevant Period, SunTrust failed to establish, maintain and enforce a supervisory system or WSPs reasonably designed to achieve compliance with FINRA's suitability rule as it relates to NT-ETFs, particularly in connection with certain of the unique features and risks associated with NT-ETFs, including the risks associated with holding NT-ETFs for extended periods. Specifically, SunTrust's WSPs recognized that NT-ETFs "c[ould] be inefficient and problematic long-term investments" and required the positions be monitored by the representative, supervising principal and the Central Supervision Group (CSG). However, SunTrust did not have reasonable procedures or guidance to representatives or supervisors regarding how to determine whether an NTETF was suitable for customers given the unique features and risks of those products. The Firm also did not have any systems in place, such as an alert or exception report, to assist in monitoring the holding periods for NT-ETFs. There is also no evidence that anyone at the Firm conducted a customer-specific suitability analysis for NT-ETF positions held for more than one day, nor did the WSPs require such an analysis.”
FINRA fined Suntrust $50,000 and required restitution payments to customers of $584,466.13.
If you have suffered losses in leveraged, inverse, short, or Ultra ETFs recommended by your financial advisor or firm, and would like to discuss your claims for free with an attorney, please contact W. Scott Greco.