On February 28, 2018, FINRA Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Western International Securities, Inc. (“WIS”) (CRD# 39262). Specifically, without admitting or denying any wrongdoing — WIS consented to paying a fine of $521,908, in addition to restitution to certain investors in the amount of $125,000 — in connection with FINRA’s findings of fact that from January 2011 – November 2015, WIS allegedly failed to supervise its registered representatives with regard to sales of certain leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“Non-Traditional ETFs”).
Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day). Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA Enforcement in its recent AWC as concerns Respondent WIS:
“[t]he performance of Non-Traditional ETFs over periods of time longer than a single trading session ‘can differ significantly from the performance… of their underlying index or benchmark during the same period of time.” FINRA Regulatory Notice 09-31.
Pursuant to the AWC, FINRA’s findings of fact allege that WIS registered representatives solicited and effected Non-Traditional ETF purchases that were unsuitable for specific customers. For example, in one instance, FINRA determined that a 73 year-old customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was purportedly steered into five Non-Traditional ETFs. As alleged by FINRA, this elderly investor held the Non-Traditional ETFs for an average of 356 days, resulting in a net loss of $20,232.
In another instance of purported unsuitable recommendations, FINRA Enforcement determined that a WIS customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was also purportedly steered into five Non-Traditional ETFs. As alleged by FINRA, this investor held the Non-Traditional ETFs for an average of 350 days, resulting in a net loss of $32,865.