On May 1, 2018, FINRA Department of Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Laidlaw & Company (UK) LTD. (“Laidlaw”) (BD# 119037). Without admitting or denying any wrongdoing — Laidlaw consented to a public censure by FINRA, the imposition of a $25,000 fine, as well as agreeing to furnish FINRA with a written certification that Laidlaw’s “[s]ystems, policies and procedures with respect to each of the areas and activities cited in this AWC are reasonably designed to achieve compliance with applicable securities laws, regulations and rules.”
In connection with its investigation surrounding the matter, FINRA Enforcement alleged that “From April 2013 through December 2015… Laidlaw failed to establish and maintain a supervisory system and written supervisory procedures (“WSPs”) reasonably designed to ensure that” Laidlaw registered “representatives’ recommendations of leveraged and inverse exchange traded funds (“Non-Traditional ETFs”) complied with applicable securities laws and NASD and FINRA Rules.”
Non-Traditional ETFs are extremely complicated and risky financial products. Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day). Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA through previous regulatory guidance:
“[t]he performance of Non-Traditional ETFs over periods of time longer than a single trading session ‘can differ significantly from the performance… of their underlying index or benchmark during the same period of time.” FINRA Regulatory Notice 09-31.
Further, because of the inherent complexities and risks embedded in Non-Traditional ETFs, FINRA has explicitly advised broker-dealers and their registered representatives that Non-Traditional ETFs “[a]re typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.” Id.
Pursuant to the AWC, FINRA’s findings of fact allege that Laidlaw registered representatives solicited and effected 869 purchases and 946 sales of Non-Traditional ETFs across 312 customer accounts, totaling in excess of $32,000,000 in transactions. Despite this volume of business in Non-Traditional ETFs, FINRA determined that Laidlaw’s own compliance systems, including its WSPs, “[d]id not require supervisors to review open positions in Non-Traditional ETFs held for extended periods or resulting in unrealized losses and did not impose product-specific limitations on Firm representatives’ ability to recommend trading in or holding Non-Traditional ETFs.” Due to these alleged infractions, FINRA Enforcement alleged that Laidlaw’s insufficient supervisory system gave rise to violations of FINRA Rules 3110 and 2010.
Moreover, brokerage firms like Laidlaw have a duty under NASD Rule 2310 and FINRA Rule 2111 — the so-called suitability rule — to, among other things, perform reasonable diligence to understand the nature of the recommended security. This due diligence “[w]ith respect to leveraged and inverse ETFs… means that a firm must understand the terms and features of the funds, including how they are designed to perform, how they achieve that objective, and the impact that market volatility, the ETFs use of leverage, and the customer’s intended holding period will have on their performance.” See FINRA Regulatory Notice 09-31 and FINRA Regulatory Notice 12-03.
Attorneys at Law Office of Christopher J. Gray, P.C. have substantial experience representing customers in FINRA arbitration cases involving claims against stockbrokers or investment advisors. Investors with questions concerning possible claims involving Non-Traditional ETFs or other non-conventional investments may contact our office at (866) 966-9598 or via email at email@example.com for a no-cost, confidential consultation.