SEC Charges RIAs and Broker-Dealers over Improper ETP Sales
The Securities and Exchange Commission has filed settled actions against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations related to unsuitable sales of complex exchange-traded products.
The Securities and Exchange Commission has filed settled actions against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations related to unsuitable sales of complex exchange-traded products to retail investors. The sales occurred between January 2016 and April 2020.
The charged firms include Royal Alliance Associates Inc., Securities America Advisors Inc., Summit Financial Group Inc., American Portfolios Financial Services/American Portfolios Advisors Inc., and Benjamin F. Edwards & Company Inc., which agreed to return more than $3 million to harmed investors.
The SEC’s five actions concern sales of volatility-linked exchange-traded products and are the first stemming from investigations conducted by the division of enforcement’s exchange-traded products initiative, which utilized trading data analytics to uncover potential unsuitable sales.
The SEC claims that value of the products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the Chicago Board Options Exchange volatility index. The offering documents made clear that the short-term nature of these products made investments more likely to experience a decline in value when held over a longer period.
The SEC indicated that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. The SEC also claim that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products.
“It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk,” said Stephanie Avakian, director of the SEC’s division of enforcement. “We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments.”
The SEC alleges that each of the firms failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules, while American Portfolios and Benjamin Edwards are also accused of failing to reasonably supervise certain representatives who recommended their customers buy and hold such products.
Without admitting or denying the findings, each firm agreed to cease and desist from future violations, a censure, and to pay disgorgement and prejudgment interest.
American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.
