Edward T. McFarlane, a broker formerly in Oppenheimer’s Jenkintown, Pennsylvania branch office, in a Letter of Acceptance, Waiver & Consent, has agreed to serve a suspension and pay a fine relating the unsuitable Exchange Traded Funds (“ETFs”) he recommended to a customer.
Between December 2010 and June 2012 McFarlane recommended 169 unsuitable trades in inverse, leveraged and inverse-leveraged ETFs. These “non-traditional” ETFs that McFarlane recommended were not suitable for the client since they did not comport with the client’s financial situation, conservative investment objectives and minimal tolerance for risk. The ETFs were held in the customer’s account for a long as 470 days, with an average holding period of 40 days. However, these types of ETFs are trading vehicles and designed to be held for the very short term.
As a result of the unsuitable trades in the ETFs, the client lost in excess of $48,000.
McFarlane agreed in May 2017 to a two-month suspension and a $5,000 fine.
McFarlane currently works at International Assets Advisor LLC in Orlando, FL. He worked at Oppenheimer from 2008 to February of this year.
Public Disclosure does not reveal the existence of customer complaints or lawsuits against McFarlane in connection with the sale of inverse and/or leveraged, “non-traditional” ETF securities.
ETFs are investment products that are now one of the most popular investments in the securities marketplace. Like mutual funds, ETFs are comprised of a “basket” of underlying assets. Those assets can be common stock, bonds, commodities, etc. The assets will usually be underlying investments in a particular sector of US industry.
But ETFs are not mutual funds; one major difference is that the price of ETFs fluctuates daily. ETFs trade on exchanges similar to a common stock. But what concerns regulators and others is the development of related investment products: the inverse and leveraged ETFs that were the subject of McFarlane’s FINRA enforcement action.
An inverse ETF is structured to deliver returns that are the inverse of its underlying “basket” of assets. It performs in the opposite direction of its underlying index by using various derivative products. Inverse ETFs are aggressive and speculative products, meant to be held for one day, that entail various risks that make them unsuitable for many investors.
Similarly, leveraged ETFs borrow against the underlying basket of assets to increase the size of the basket and thereby increase their price performance. Of course, if the underlying assets underperform, the underperformance of the leveraged ETF is magnified accordingly.
Both inverse and leveraged ETFs (and the inverse-leveraged ETFs McFarlane improperly recommended to his client) are meant to be held for the short term.
They are very complex products and are not suitable for many investors. Indeed, many brokerage firms, recognizing this, prohibit their brokers from soliciting customers to purchase leveraged or inverse ETFs.
Any investor considering transacting in inverse or leveraged ETFs should make sure he is aware of how these products operate and what the risks are; in other words, that they are suitable investments.
It has been widely acknowledged by broker-dealers and by state and federal securities regulators that inverse and leveraged ETFs are highly risky securities, and that in connection with the recommendation and sale of inverse or leveraged ETFs, many brokers did not, and do not, fully understand the risks and characteristics of these securities.
“Non-traditional ETFs may not be suitable for retail investors” and “inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”
In 2009, the SEC staff and FINRA issued an Investors Alert, with respect to Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors, and warned that:
before purchasing an inverse or leveraged ETF, investors should also consider seeking the advice of an investment professional. Be sure to work with someone who understands your investment objectives and tolerance for risk. Your investment professional should understand these complex products, be able to explain whether or how they fit with your objectives, and be willing to monitor your investment.
FINRA Investor Alert, August 19, 2009
If you have questions concerning the suitability of the investments in your brokerage account, you should contact The Guiliano Law Group for a free consultation.
Guiliano Law Group
Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.
To learn more about FINRA Securities Arbitration, and the legal process, please visit us at securitiesarbitrations.com
