FSC Securities Corporation, a broker-dealer headquartered in Atlanta, Georgia, has been censured and fined $100,000.00 by Financial Industry Regulatory Authority (FINRA) based upon consenting to findings that the firm failed to supervise sales of leveraged, inverse, or inverse and leveraged exchange traded funds and enabled its staff to make unsuitable investment recommendations of exchange traded funds to customers. Letter of Acceptance, Waiver and Consent, No. 2010024620303 (Aug. 10, 2017).
According to the AWC, between January of 2009 and September of 2014, the firm’s registered representatives made recommendations to customers for $92,000,000.00 worth of non-traditional exchange traded funds to be purchased. Evidently, transactions were effected in 1,400 accounts owned by retail investors, where an estimated 6,500 purchases of the non-traditional exchange traded funds were made, enabling the registered representatives to accumulate commissions exceeding $600,000.00.
The AWC stated that throughout this period, the firm depended on supervisory procedures pertaining to non-traditional exchange traded funds transactions; yet they were inadequate for purposes of assessing the risks and features. Apparently, the length of customers’ non-traditional exchange traded fund holding periods had not been considered as part of the firm’s supervisory procedures between January of 2009 and May of 2012.
The firm purportedly failed to guide supervisory staff in determining risks to investors that held the products for extended periods, and had no other adequate supervisory process in place until October of 2014. Consequently, FINRA found that the firm did not adequately supervise the holding periods on the non-traditional exchange traded funds; conduct violative of FINRA Rule 2010, as well as NASD Rule 3010(a) and 3010(b).
The AWC revealed that in one case, a sixty-seven-year-old customer informed the firm about having a conservative to moderate risk tolerance, but a non-traditional exchange traded fund was held in the customer’s individual retirement account for over thirteen hundred days, causing the customer to incur $13,420.00 in losses. Additionally, an eighty-two-year-old customer with a conservative risk tolerance held a non-traditional exchange traded fund in her individual retirement account for over five hundred days, resulting in a $14,251.00 loss.
According to the AWC, the firm did not engage in an adequate analysis of non-traditional exchange traded fund risk factors and features for purposes of suitability. The firm’s stockbrokers reportedly made unsuitable investment recommendations to customers, including elderly investors with conservative to moderate risk tolerances. Customers evidently incurred $492,485.00 in losses as a result of the unsuitable transactions effected in their accounts. Consequently, FINRA found that the firm’s conduct was violative of FINRA Rules 2010 and 2111, as well as NASD Rule 2310.
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