Broker-Dealer ProEquities, Inc. is Censured and Fined by FINRA for Inadequately Supervising Reps Selling Non-Traditional ETFs November 4, 2016

By Jay H. Salamon

On October 17, 2016, broker-dealer ProEquities, Inc. of Birmingham, Alabama was censured and fined $165,000 by FINRA. The firm consented to the sanctions and to the entry of findings that (among other things) it failed to establish, maintain, and enforce adequate written procedures to supervise sales of non-traditional Exchange Traded Funds or “ETFs”. The findings stated that the firm permitted its registered representatives to solicit transactions in non-traditional ETFs even though the firm did not have in place written procedures relating to suitability and supervision of recommendations involving non-traditional ETFs. The firm also failed to have in place a procedure or system to identify instances in which a customer might be holding a position in a non-traditional ETF for an extended period of time. In addition, the firm did not provide adequate training and guidance to its registered representatives regarding the unique characteristics and risks of non-traditional ETFs.

What Are ETFs?

What are ETFs and what is meant by “non-traditional” ETFs? ETFs are usually registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Shares of traditional ETFs trade daily on a securities exchange at prices established by the market.

Leveraged and Inverse Non-Traditional ETFs

Non-traditional ETFs are very different. They come in three main varieties: “leveraged,” “inverse,” and combined leverage/inverse. A leveraged ETF generally seeks to return some multiple of the daily performance of the index or benchmark it tracks — hence product names include terms like “2X,” “double,” or even “triple.” An inverse ETF generally aims to deliver the opposite of the daily performance of the index or benchmark it tracks. ETFs that are both inverse and leveraged seek a return that is a multiple of the inverse performance of the underlying index.  To accomplish these enhanced results, leveraged and inverse ETFs use a variety of complex options, swaps, and index futures most people would never dream of using, let alone  be competent to use on their own. If an ETF includes in its name words like Ultra, 2X, Double Long, Bear Plus,or Inverse, it’s probably a leveraged or inverse fund.

The most important thing to understand about leveraged and inverse ETFs is that they’re usually very bad places to put your money and are not meant for mid-range or long term investing – ie., the type of investing in which most people engage. Leveraged and inverse ETFs reset their market exposure each day and are designed to achieve their stated objective only on a daily basis. The longer one holds them, the more they will tend to deviate from their stated objective. In fact, they can even move in the opposite direction from their stated objective. Thus, way back in June 2009, FINRA issued Regulatory Notice 09-31 highlighting the unique characteristics and risks of non-traditional ETFs and cautioning firms and financial advisers that non-traditional ETFs are typically not suitable for retail investors who plan to hold the funds longer than a single trading session.

FINRA Fines ProEquities

This brings us back to FINRA’s sanctioning of ProEquities. During the time period January 1, 2008 through April 30, 2012, ProEquities permitted its registered representatives to solicit transactions in non-traditional ETFs, even though:

  • the Firm failed to maintain any written procedures relating to suitability and supervision of recommendations involving non-traditional ETFs;
  • the Firm failed to implement any procedure or system to identify instances in which a customer might be holding a position in a non-traditional ETF for an extended period of time; and
  • the Firm failed to provide adequate training and guidance to its registered representatives regarding the unique characteristics and risks of non-traditional ETFs.

If you lost money in non-traditional ETFs sold by ProEquities, Inc. — or for that matter, by any other brokerage firm – we can help you recover some or all of your losses. McCarthy Lebit’s securities lawyers, Hugh Berkson and Jay Salamon, represent investors who have lost money as a result of stockbroker misconduct, investment fraud, and Ponzi schemes. We handle most investor-related cases on a contingent fee basis and advance the case expenses. We get paid for our fees only out of money recovered for our clients. Contact us today by calling Hugh Berkson at (866) 932-1295 for a free evaluation of your recovery options. Or send an email to hdb@mccarthylebit.com. But don’t delay; limitations and deadlines may apply to your claim.

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