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Compliance January 9, 2014
Stifel, Nicolaus Consents to FINRA Fines
The Financial Industry Regulatory Authority (FINRA) has ordered Stifel, Nicolaus & Company, Incorporated and Century Securities Associates, Inc. to pay fines and restitution to customers in connection with sales of leveraged and inverse exchange-traded funds (ETFs).
Reported by Rebecca Moore
St. Louis-based broker/dealers Stifel and Century are affiliates and are both owned by Stifel Financial Corporation. Stifel agreed to pay a fine of $450,000 and to make restitution of nearly $340,000 to 59 customers. Century agreed to pay a fine of $100,000 and to make restitution of more than $136,000 to six customers. In settling this matter, Stifel and Century neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
In a statement to PLANADVISER, the company said, “Stifel and Century are pleased to have resolved this matter. We will continue to serve our clients consistent with their investment goals.”
FINRA explained that leveraged and inverse ETFs “reset” daily, meaning they are designed to achieve their stated objectives on a daily basis so their performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets.
FINRA found, between January 2009 and June 2013, Stifel and Century made unsuitable recommendations of non-traditional ETFs to certain customers because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs; nonetheless, Stifel and Century allowed the representatives to recommend them to retail customers. Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms’ representatives, and who held those investments for longer periods of time, experienced net losses.
FINRA also found Stifel and Century did not have reasonable supervisory systems in place, including written procedures, for sales of leveraged and inverse ETFs. Stifel and Century generally supervised transactions in leveraged and inverse ETFs in the same manner that they supervised traditional ETFs, and neither firm created a procedure to address the risk associated with longer-term holding periods in the products. Further, both firms failed to ensure that their registered representatives and supervisory personnel obtained adequate formal training on the products before recommending them to customers.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA’s BrokerCheck, accessed at www.finra.org/brokercheck or by calling (800) 289-9999.