Coastal Equities, Inc., a brokerage firm headquartered in Wilmington, Delaware, has been censured and fined $15,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm did not properly supervise the sale of non-traditional exchange traded funds. Letter of Acceptance, Waiver and Consent, No. 2014041310602 (June 9, 2017).
According to the AWC, between October of 2013 and September of 2014, the firm did not create and implement supervision systems that were appropriate in reference to sales of inverse, leveraged, and inverse-leveraged exchange traded funds transacted upon by the firm’s registered representatives. The AWC stated that registered representatives sold these products to customers despite the products having been held by customers for longer than they were meant to be held. Particularly, the AWC stated that non-traditional exchange traded funds were generally meant to be held for no longer than one trading period especially in circumstances when the markets were volatile.
Apparently, the firm’s supervisory procedures called for due diligence on products to be performed by the firm prior to staff effecting sales so that staff members would become cognizant of the benefits and drawbacks of the products. Evidently, the firm had supervisory processes in place to review the performance of products recommended by the firm’s staff and procedures to ensure that products were only being sold by representatives who were authorized and adequately trained. Yet, Coastal Equities, Inc. never demonstrated to FINRA that the firm abided by its own practices. Specifically, the firm was required to document that supervisory protocols were followed but had no documentation to this effect.
The AWC further stated that Coastal Equities imposed a requirement on customers to complete and deliver to the firm a qualification agreement before any transactions involving non-traditional exchange traded funds were consummated by registered representatives. Evidently, this agreement was designed to provide investors with an education on the exchange traded fund risks, terms and conditions, and confirm that the customer comprehended the level of risk involved. However, the firm failed to procure these qualification agreements as their own policies required.
Moreover, the firm apparently neglected to utilize exception reports or any adequate supervision system that reviewed the losses pertaining to the inverse, leveraged, and inverse-leveraged products, or which reviewed how long investments were held by customers. Consequently, FINRA found the firm’s supervisory failures to be conduct violative of FINRA Rule 2010 and NASD Rule 3010.
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