The Securities and Exchange Commission announced a new initiative focused on complex products: The Exchange-Traded Products Initiative. It’s led by the Division of Enforcement’s Complex Financial Instruments Unit. It was developed by Armita Cohen and data analytics specialists Daniel Koster and Jonathan Vogan and has been coordinated by Ms. Cohen.
The first inkling of this initiative was the Morgan Wilshire case in late September. That firm was selling inverse ETFs to its clients. The firm’s representatives were not knowledgeable about the products. The inverse ETF tries to create the opposite returns of an index over a short period of time, typically one day. If held longer, the product stop achieving the originally targeted results.
Like with the earlier case, the five cases announced as part of the Exchange-Traded Products Initiative were complex products but had the patina of simplicity because they were exchange-traded. The products were designed be held in the short-term for limited use.
Instead, the firms were marketing to a broader set of clients and not getting them back out of the product in the short-term. Of course, this means that customers lost money.
The compliance failure was the firms failing to determine if the product was suitable for the client, a lack of training on the product and a lack of appropriate review of the transactions.
Some of this will be increasingly problematic under the new Reg BI standards instead of the older standards for broker-dealers.
Sources:
- SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products
- SEC Order – American Portfolios Financial Services and American Portfolio Advis…
- SEC Order – Benjamin F. Edwards & Company
- SEC Order – Summit Financial Group
- SEC Order – Securities America Advisors
- SEC Order – Royal Alliance Associates
- SEC Settles Charges Against Broker-Dealer for Failure to Supervise Brokers Who Made Unsuitable Recommendations
- SEC Order Morgan Wilshire
