Broker-dealer Stifel Nicolaus & Co. and its subsidiary, Century Securities Inc., have agreed to pay more than $1 million in fines and restitution related to the sale of nontraditional exchange-traded funds.
The Financial Industry Regulatory Authority Inc. alleged that between January 2009 and June 2013, Stifel and Century Securities sold leveraged and inverse ETFs to some 65 customers for whom the investments were unsuitable. The regulator said that the firms didn't have the proper training or written procedures in place to make sure that financial advisers had an “adequate and reasonable basis” for recommending the product.
“The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers,” Brad Bennett, Finra executive vice president and chief of enforcement, said in a statement. “Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors.”
Stifel sold a total of about $641 million in nontraditional ETFs to retail investors from 2009 to 2013, Finra said.
Century sold about $31 million.
Leveraged and inverse ETFs utilize swaps, futures contracts and other derivatives to return a multiple and/or inverse of the performance of an underlying index.
Their value can quickly diverge from the performance of the benchmark, especially amid volatile markets, and they aren't suitable for conservative investors, Finra said.
“It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain,” the statement said. “Some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs.”
Leveraged and inverse ETFs have long been a focus of regulators.
In 2012, Finra fined Citigroup Inc., Morgan Stanley, UBS AG and Wells Fargo & Co. $9.1 million over the sale of such funds.
Last year, Finra brought 19 cases involving such ETFs and issued more than $1.5 million in fines and $780,000 in restitution.
Stifel, which has about 2,000 advisers, will pay a fine of $450,000 and restitution of $340,000 to 59 customers. Century, which oversees about 145 independent advisers, agreed to a fine of $100,000 and restitution of $136,000 to be made to six customers.
Stifel and Century Securities agreed to pay the fines without agreeing to or denying the accusations made in the complaint.
“Stifel and Century are pleased to have resolved this matter,” said Tim Beecher, a spokesman for the companies. “We will continue to serve our clients consistent with their investment goals.”