Sigma Financial Corporation a brokerage firm headquartered in Ann Arbor Michigan has been sanctioned by the Financial Industry Regulatory Authority (“FINRA”) based upon findings that the firm failed to supervise its non-traditional exchange traded fund transactions to ensure that they were properly reviewed for suitability. Letter of Acceptance, Waiver and Consent No. 2016052300602 (Mar. 7, 2019).
According to the AWC, between May 22, 2014 and December 31, 2016, 1,475 non-traditional exchange traded fund transactions had been effected by 110 representatives of Sigma Financial Corporation in over 300 customer accounts. Evidently, the transactions had a $26,500,000.00 total value, producing commissions of $292,000.00 for the firm.
The AWC stated that throughout this period, there were written supervisory procedures used by Sigma which governed the authorization of exchange traded fund transactions. Evidently, the procedures encompassed both traditional and non-traditional exchange traded funds, including inverse, leveraged, and inverse-leveraged funds.
Apparently, a product manager was required under the firm’s procedures to assess suitability of non-traditional exchange traded funds for investors, and to convey that information within the firm’s marketing materials and broker trainings. Evidently; however, those procedures were never enforced by the firm. Specifically, the AWC stated that written materials were not created to guide brokers in making non-traditional exchange traded fund suitability determinations. The firm also reportedly neglected to educate brokers about the features and risks of non-traditional exchange traded funds.
Apparently, there were no adequate systems or processes utilized by the firm to identify problematic and possibly unsuitable non-traditional exchange traded fund transactions despite FINRA making firms acutely aware of the risks of those investments. FINRA also indicated that there were no exception reports used by the firm for purposes of examining the length in which investors held the non-traditional funds in their investment accounts. Further, other than relying upon the review of a daily blotter, the firm did not conduct a meaningful review of the non-traditional exchange traded funds. Consequently, the firm’s customers, in many cases, maintained the non-traditional exchange traded funds in their accounts for prolonged periods. Supposedly, the were no red flags raised by the firm concerning the problematic holding periods of those investments; the firm took no action.
Apparently, a report was issued by FINRA following its examination of the firm in 2016, where the regulator identified red flags about the firm’s problematic supervision systems and written supervisory procedures pertaining to the non-traditional exchange traded funds. Evidently, the firm corresponded with FINRA to inform them that it would remedy the issue by mandating brokers’ non-traditional exchange traded fund trainings, and requiring non-traditional exchange traded fund purchasers to review and execute a statement which informed them about the features and risks of ETFs.
Eventually, an update had been requested by FINRA in January of 2017 concerning any implementations that had been made by the firm to bring its supervision systems up to FINRA’s compliance standard. In response, the firm admitted to not taking action like it said it would. A sales prohibition was then issued by the firm in March of 2017, precluding brokers from selling any non-traditional exchange traded funds which were seeking to produce returns greater than double the relevant index or benchmark index.
Moreover, the AWC revealed that FINRA requested further updates regarding the firm’s corrective measures, but the firm stalled again, failing to timely confront brokers who had possibly made unsuitable trades in customer accounts. Critically, the firm claimed that many customers were not contacted about the potentially problematic trades in their accounts. The AWC indicated that the firm’s supervision of the non-traded exchange traded funds was unacceptable even after months had passed since FINRA’s requests for the firm’s cooperation. FINRA found the firm’s conduct in this regard to be violative of FINRA Rules 2010 and 3110 and National Association of Securities Dealers (NASD) Rule 3010.
