Sterne Agee Consents to FINRA Fine Concerning ETFs

By November 25, 2015 September 20th, 2017 News

Sterne Agee Financial Services, Inc. consented to a public censure and FINRA fine of $25,000 relating to FINRA’s claims that Sterne Agee failed to enforce certain written supervisory procedures concerning inverse or leveraged exchange traded funds (ETFs).  FINRA specifically alleged:

“Sterne Agee maintained written supervisory procedures that prohibited its registered representatives from soliciting transactions in inverse or leveraged ETFs.  From approximately May 2010 through October 2013, a Sterne Agee registered representative (“PC”) solicited a total of 966 transactions in leveraged and inverse ETFs in contravention of the Firm’s written supervisory procedures.  PC mismarked all of the order tickets as “unsolicited” when, in fact, PC had solicited each order.”

FINRA also noted that “despite the occurrence of almost 1000 transactions in a limited number of inverse and leveraged ETFs, Sterne Agee never investigated whether the transactions were actually solicited.”  FINRA determined that Sterne Agee’s conduct violated various FINRA rules.

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Leveraged Exchange Traded Funds (“ETFs”) are investments that seek to deliver multiples of the performance of the index or benchmark they track.  Examples are ProShares’ Ultra S&P500, which aims to produce 200% of the return of the S&P, or the Ultra Dow30, which aims to produce 200% of the return of the Dow Jones Industrial Average Index.  Typically the funds achieve these results with a range of investment strategies, which may include swaps, futures contracts and other derivative instruments.  FINRA has warned that because most leveraged ETFs strive to achieve their stated objectives on a daily basis, over longer periods of time their performance can differ significantly from their benchmarks due to the effects of compounding.  Because of the complexity of these leveraged ETFs, it is important that firms selling these funds present a fair and balanced picture of both the risks and benefits of an investment in leveraged ETFs.

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