Massachusetts securities regulators Thursday charged a broker-dealer with failing to supervise representatives who sold unsuitable, complex leveraged exchange-traded funds through another firm that caused $2.3 million in investor losses.
From August 2017 to April 2020, Purshe Kaplan Sterling Investments Inc. of Albany, New York, allowed dually registered agents to conduct thousands of transactions involving leveraged ETFs without oversight while working as investment adviser representatives for Harvest Group Wealth Management of Waltham, Massachusetts, according to a complaint filed by William Galvin, Massachusetts secretary of the commonwealth.
The leveraged ETFs were sold to investors who held them longer than the one day recommended for the products, which are tied to baskets of underlying investments and can magnify their movements for dramatic gains or losses.
“In total, [PKS] failed to review the suitability of thousands of leveraged exchange-traded fund (‘leveraged ETF’) transactions executed by [dually registered advisers] in the accounts of Massachusetts investors,” the complaint states. “As a result of [PKS’} neglect, Massachusetts investors — often holding leveraged ETF positions for periods in excess of one-year — experienced significant losses.”
Oversight of the sales of complex products is a Finra priority this year. In addition, the Securities and Exchange Commission has pursued enforcement cases involving complex exchange-traded products.
In 2009, the Financial Industry Regulatory Authority Inc. told its member brokerages that leveraged ETFs are unsuitable for ordinary investors if held for more than a day.
“Despite these warnings issued more than a decade ago, the Harvest Group invested more than 340 client accounts in two different leveraged ETFs for periods of time longer than a day, week, month, and even a year,” the complaint states. “PKS failed to review or flag any of these transactions, resulting in Massachusetts investors losing more than $2.3 million.”
Galvin is seeking restitution for the harmed investors as well as an administrative fine and a PKS censure. PKS did not respond to a request for comment. Laurie Ingwerson, a managing partner at Harvest Group, declined to comment.
The complaint states that PKS violated Finra rules on supervising representatives’ outside business activities by failing to review its agents’ transactions at Harvest Group — despite amending internal policies in 2019.
“PKS utterly failed in its supervisory responsibilities of its [dually registered advisers],” the complaint states. “Massachusetts investors should not suffer because of PKS' failures.”
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