Finra on Monday fined broker-dealer Berthel Fisher & Co. Financial Services Inc. and an affiliate $775,000 in connection with compliance failures, including
inappropriate sales of alternative investments and nontraditional exchange-traded funds.
Berthel Fisher failed to supervise the sale of alternative investments such as non-traded real estate investment trusts as well as leveraged and inverse ETFs, the Financial Industry Regulatory Authority Inc. said.
Between 2008 and 2012, the independent broker-dealer “had inadequate supervisory systems and written procedures for sales” of the alternative investments, which also included managed futures, oil and gas investments, equipment-leasing programs and business development companies, the industry regulator said.
“A strong culture of compliance is an essential element of the proper marketing of complex products,” Brad Bennett, Finra's executive vice president of enforcement, said in a statement. “Berthel's supervision of the sales of nontraded REITs, inverse ETFs and other products fell short of this standard, as it
failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.”
The fine is the latest in a series levied by securities regulators against
broker-dealers that allegedly failed to conduct due diligence into investment offerings and ensure proper training of employees who sell complex products.
Berthel Fisher, which didn't formally admit or deny the findings, said that the investigation was “a result of a 'sweep' done by Finra throughout the industry” and that the firm settled the case “to eliminate any on-going legal expenses.”
“We worked hard to cooperate with Finra and appreciate the guidance they are able to provide us in our heavily regulated industry,” Thomas J. Berthel, the firm's chief executive, said in a statement.
Berthel Fisher conducted poor suitability reviews of products and failed to properly train employees, who manually recorded some, but not all, of their clients' alternative investment exposure, Finra said.
That may have exposed clients to overconcentration in the asset class.
Berthel Fisher's reps also recommended $49.4 million in nontraditional ETFs to more than 1,000 clients, according to Finra.
In some cases, the products were sold to customers "who had stated a preference for a conservative approach to investments" and the investments were sometimes held for years, resulting in net losses.
Leveraged and inverse ETFs provide magnified exposure to market movements and can deviate greatly from their benchmarks over periods longer than a day. They are generally not considered suitable for conservative, buy-and-hold investors.
The firm also failed to supervise a remote branch office by not reviewing e-mails and conducting the appropriate audits, the regulator said.
A Berthel Fisher affiliate, Securities Management & Research Inc., was also fined on Monday in connection with not retaining certain e-mails.
In its statement, Berthel Fisher said that it has removed leveraged and inverse ETFs from its platform, that the branch office is no longer a part of the firm and that “the e-mail issue was an outsourcing problem.”
In addition to the Finra fine, Berthel Fisher will have to pay nearly $13,293 in restitution to investors and retain a compliance consultant.
The firm consented last year to $149,000 in fines by state authorities in Missouri and South Dakota in connection with sales of “unsuitable” products, according to the firm's
disciplinary records.
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