FSC Securities Corp., one of the Advisor Group broker-dealers, is the latest firm to pay significant restitution and fines stemming from problems supervising trades of leveraged, inverse exchange traded funds.
The Financial Industry Regulatory Authority Inc. and FSC Securities last Thursday announced the $100,000 fine and $492,000 payment to clients for FSC's failure to reasonably supervise leveraged ETFs from January 2009 through September 2014.
FSC joins a number of firms that have run into problems with brokers trading of leveraged ETFs, which use leverage to amplify returns of a stock index and are not designed for buy and hold investors. Earlier this year, Morgan Stanley agreed to pay an $8 million penalty and admit wrongdoing to settle charges related to single inverse ETF investments it recommended to advisory clients, according to the Securities and Exchange Commission. And last year, Finra and the Nasdaq Stock Market Inc. fined Wedbush Securities Inc. $675,000 for a series of trading and clearing snafus involving a client's redemption activity and trading of leveraged ETFs.
A spokesman for Advisor Group, Jason Lahita, said in an email that, as a matter of company policy, the broker-dealer network does not comment on such matters.
During the five-and-a-half year period, FSC executed close to 6,500 purchases of leveraged, or inverse, non-traditional ETFs in about 1,400 retail client accounts, according to Finra. Those sales were worth close to $92 million and generated $603,000 in commissions.
"However, FSC failed to establish and maintain a supervisory system, including written procedures, reasonably designed to ensure that the firm's offering of non-traditional ETFs complied with NASD and Finra rules," according to Finra. "Non-traditional ETFs have certain risks that are not associated with traditional ETFs or equities. The firm's general supervisory system was not sufficiently tailored to address the unique features and risks involved with these products."