Network 1 Financial a broker headquartered in Red Bank, New Jersey, has been censured and fined $20,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that Network 1 Financial failed to supervise non-traditional exchange traded funds effected by its registered representatives. Letter of Acceptance, Waiver and Consent, No. 2015046575201 (Oct. 2, 2017).
According to the AWC, signed by William R. Hunt, Jr., between August of 2010 and September of 2015, twenty-nine of the firm’s registered representatives effected inverse, leveraged as well as inverse-leveraged exchange traded funds in one-hundred and sixty-seven of the firm’s customer investment accounts. Apparently, a total of six hundred and forty-five non-traditional exchange traded fund transactions were placed involving $48,000,000.00 of customers’ funds.
The AWC further stated that sales of non-traditional exchange traded funds were not reasonably supervised by firm. Particularly, the firm reportedly lacked any written supervisory procedures for non-traditional exchange traded funds until November 22, 2013, and the new procedures set forth by then failed to provide guidance on how the non-traditional exchange traded funds would be supervised and assessed for risks and features.
The AWC also stated that from August of 2010 to September of 2015, the firm’s written supervisory procedures were inadequately designed to address whether the products were suitable for customers. The Firm reportedly failed to develop a system of reviewing transactions for suitability, such as generating exception reports for transactions or monitoring of non-traditional exchange traded fund holding periods. Apparently, supervisors were not obligated by the firm to assess unrealized losses or extended holding periods relating to customers’ non-traditional exchange traded funds.
Moreover, the firm reportedly failed to train its staff and supervisors on non-traditional exchange traded funds. Particularly, the AWC stated that those investments were never addressed as part of the firm’s educational programs, compliance meetings, and trainings. The firm’s stockbrokers reportedly made recommendations to customers without any training on the products beforehand. FINRA found that Network 1’s conduct in that regard was violative of FINRA Rules 2010, 3110 and NASD Rule 3010.
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