Broker-dealer Oppenheimer & Co. has been fined $2.25 million for selling non-traditional exchange-traded funds (ETFs) to retail customers without reasonable supervision and for recommending the investments to clients for whom they were unsuitable. The Financial Industry Regulatory Authority (FINRA) announced these developments last month. New York-based Oppenheimer was also ordered to pay $716,000 in restitution to customers who lost money on the investments.
Since 2009, Oppenheimer had rules that barred its representatives from soliciting retail customers to buy the investments. That prohibition included leveraged, inverse and inverse-leveraged exchange-traded funds. The company rules also barred representatives from executing unsolicited purchases of the funds for retail investors unless the customers had more than $500,000 in liquid assets. However, FINRA says that Oppenheimer representatives continued to solicit retail customers for the investments and also executed unsolicited transactions for customers who did not meet the asset requirement. Non-traditional exchange-traded funds are designed to return a multiple of an underlying financial index or benchmark, the inverse of that benchmark, or both, over the course of one trading session, usually a single day.
As a result, the longer-term performance of the investments can differ significantly from their underlying index or benchmark. For that reason, the investments may not be suitable for retail customers. FINRA said Oppenheimer representatives executed more than 30,000 non-traditional exchange-traded fund transactions totaling roughly $1.7 billion for customers from August 2009 through Sept. 20, 2013. According to the regulator, some conservative investment clients lost money. These are examples:
• An 89-year-old customer whose annual income was $50,000 held 96 of the investments for an average of 32 days, resulting in a $51,847 net loss.
• A 91-year-old client with an annual income of $30,000 held 56 of the investments for an average of 48 days, producing a net loss of $11,161.
• A 67-year-old customer whose annual income was $40,000 held two of the investments in her account for 729 days, resulting in a $2,746 net loss.
As is usually the case in matters of this sort, Oppenheimer neither admitted nor denied the charges, but interestingly the company consented to entry of the FINRA findings. Brad Bennett, FINRA’s enforcement chief had this to say:
Written procedures are worthless unless accompanied by a program to enforce them. While Oppenheimer’s procedures prohibited solicitation of non-traditional ETFs, the absence of any meaningful compliance effort resulted in its representatives continuing to solicit unsuitable non-traditional ETF purchases, including a number involving elderly investors.
It’s good to see FINRA at work, protecting the public against behavior such as we see in this case. We are oftentimes prone to criticize the government, but in this case we should commend those with FINRA who took action.
Source: USA Today
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