1st Discount Brokerage, headquartered in Lake Worth, Florida, was censured and fined by Financial Industry Regulatory Authority (FINRA) after consenting to findings that the firm failed to create and implement adequate supervision protocols and systems pertaining to non-traditional exchange traded funds, and failed to provide reasonable supervision pertaining to non-traditional exchange traded fund sales. Letter of Acceptance, Waiver and Consent, No. 2013038328301(Nov. 9, 2016).
According to the AWC, between January of 2010 and December of 2011, approximately fifty of the firm’s stockbrokers effected trades in non-traditional exchange traded funds within customer accounts. Collectively, the stockbrokers effected 13,496 transactions containing a combined approximate value of $358,000,000.00.
The AWC stated that the firm, throughout this time frame, lacked written supervisory procedures which were designed to cover the supervision and suitability aspects pertaining to non-traditional exchange traded funds. Apparently, the written supervisory procedures which the firm utilized failed to detail any guidance for how to go about reviewing such products, given the uncommon risks and features associated with them.
The AWC reported that training regarding non-traditional exchange traded funds was not provided to staff members, which included principals as well as registered representatives. Moreover, the firm had no requirement in place for training to be provided to the prinicpals or registered representatives prior to non-traditional exchange traded fund recommendations being made by such individuals to customers.
Apparently, the firm was cited for failing to have any supervisory procedure in place to monitor non-traditional exchange traded funds for holding periods. The lack of such supervisory controls in this regard, according to FINRA, led customers to suffer from losses due to extended holding periods. FINRA found that the firm’s supervisory failures in this regard were violative of FINRA Rule 2010 as well as NASD Rule 3010.
The AWC additionally revealed that 1st Discount Brokerage, via its stockbrokers, did not engage in a reasonable suitability examination of non-traditional exchange traded funds to comprehend the features, benefits, and risks of such products prior to recommending that customers purchase them. Further, the firm reportedly did not reassess the products’ suitability even though the products contained unique risks associated with compounding, leveraging, and the daily reset.
The AWC further detailed that 1st Discount Brokerage stockbrokers solicited purchases in the non-traditional exchange traded funds for customers which were not suitable for investing in such. Particularly, certain customers who intended on investing conservatively had been positioned risky products by the firm’s stockbrokers. For example, a conservative fifty-nine-year-old investor was apparently solicited for purchase of eight non-traditional exchange traded funds. The customer reportedly held the positions in the funds for thirty-four days on average, in which the customer suffered losses of $6,937.78.
In another case, a seventy-two-year-old customer with conservative investment objectives had been solicited for purchase of a non-traditional exchange traded fund, where the customer suffered a $5,088.64 loss after holding the fund for over five hundred and nine days. Moreover, a fifty-eight-year-old investor with conservative investment objectives was purportedly positioned a non-traditional exchange traded fund, and suffered a $1,727.94 loss after holding the fund for three hundred and sixty-three days.
FINRA found that the firm’s conduct of allowing stockbrokers to make unsuitable recommendations was violative of FINRA Rules 2010 and NASD Rule 2310. In addition to the fine and censure, the firm was ordered to provide a total of $39,060.18 in restitution to affected customers.
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