Garden State Securities, Inc., a brokerage firm headquartered in Red Bank, New Jersey, was censured and fined by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm, inter alia, failed to supervise its exchange traded fund business. Letter of Acceptance, Waiver and Consent, https://securitiesarbitrations.com//inverse-leveraged-etf-funds/No. 2013035131702 (Apr. 12, 2017).
According to the AWC, between July of 2011 and June of 2012, at least twelve of Garden State Securities’ brokers effected sales of non-traditional exchange traded funds to the firm’s customers. The AWC stated that the products were generally not appropriate for customers holding their position for extended trading sessions, especially during periods of market volatility. Apparently, customers held positions in the products for extending periods.
The AWC revealed that during the timeframe in which the sales of non-traditional exchange traded funds were effected by stockbrokers, the firm did not have any written supervisory procedures which were designed to monitor the sales and ensure that the recommended products were suitable for customers. Further, the firm reportedly failed to develop and implement a supervision system that would allow the firm’s supervisors to reasonably conclude that the transactions were suitable.
Apparently, trade blotters were manually reviewed by Garden State Securities’ supervisors to identify when non-traditional exchange traded fund sales were not appropriate, yet FINRA found that this system was ineffective at assessing suitability. The firm reportedly had no way of detecting when a non-traded exchange traded fund sale was effected instead of a traditional exchange traded fund. Further, the firm evidently failed to incorporate any exception reports for non-traditional exchange traded funds. Moreover, the periods of time which customers held their investments, as well as the investment losses sustained by them, had not been adequately reviewed by the firm. Consequently, FINRA found the firm’s supervisory failures to be violative of FINRA Rule 2010 and NASD Rule 3010.
Garden State Securities has been identified in twenty-one regulatory actions and three customer initiated investment related arbitration actions concerning allegations of the firm’s misconduct.
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