Finra has hit Oppenheimer & Co. Inc. with a $2.25 million fine and ordered the firm to pay more than $716,000 to affected customers for selling leveraged, inverse and inverse-leveraged exchange-traded funds without reasonable supervision, and for recommending unsuitable non-traditional ETFs.
More than 30,000 non-traditional ETF transactions, totaling approximately $1.7 billion for customers, were carried out by Oppenheimer representatives from August 2009 through end of September 2013, according to the
Financial Industry Regulatory Authority Inc., which
announced the sanctions on Wednesday.
Oppenheimer & Co. Inc. neither admitted nor denied the charges, but consented to Finra's finding.
Two months before the period in question, Finra had advised broker-dealers of the risks and inherent complexities of certain non-traditional ETFs through its
Regulatory Notice 09-31, according to its release.
In response, Oppenheimer had instituted policies in August 2009 to prevent its representatives from suggesting the purchase of non-traditional ETFs to retail customers. The firm also prohibited them from purchasing the ETFs unless the customer met specific criteria, such as having more than $500,000 in liquid assets.
Despite this, representatives continued to solicit retail customers to purchase non-traditional ETFs and execute unsolicited non-traditional ETF transactions even though the customers did not meet the criteria.
"Written procedures are worthless unless accompanied by a program to enforce them,” Brad Bennett, Finra executive vice president and chief of enforcement, stated in the release.
“While Oppenheimer's procedures prohibited solicitation of non-traditional ETFs, the absence of any meaningful compliance effort resulted in its representatives continuing to solicit unsuitable non-traditional ETF purchases, including a number involving elderly investors," he said.
In addition, Finra reported a lack of an adequate supervisory system for the ETFs, which resulted in significant loses for Oppenheimer's retail customers, as they ended up holding the ETFs in their accounts for weeks, months and sometimes years.
It also found Oppenheimer negligent in assessing the risks and features of these non-traditional ETFs and, as a result, unfit to have a reasonable basis to recommend them to their retail customers.
For instance, an 89-year-old customer with a conservative risk profile and an annual income of $50,000 held 96 non-traditional ETF positions for an average of 32 days (and for up to 470 days), resulting in a net loss of $51,847, according to Finra.
