On February 28, 2018, FINRA Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Western International Securities, Inc. (“WIS”) (CRD# 39262). Specifically, without admitting or denying any wrongdoing — WIS consented to paying a fine of $521,908, in addition to restitution to certain investors in the amount of $125,000 — in connection with FINRA’s findings of fact that from January 2011 – November 2015, WIS allegedly failed to supervise its registered representatives with regard to sales of certain leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“Non-Traditional ETFs”).

As our firm has highlighted in a number of recent blog posts, 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 Enforcement in its recent AWC as concerns Respondent WIS:

“[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.

Furthermore, 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. [emphasis added].

Pursuant to the AWC, FINRA’s findings of fact allege that WIS registered representatives solicited and effected Non-Traditional ETF purchases that were unsuitable for specific customers. For example, in one instance, FINRA determined that a 73 year-old customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was purportedly steered into five Non-Traditional ETFs. As alleged by FINRA, this elderly investor held the Non-Traditional ETFs for an average of 356 days, resulting in a net loss of $20,232.

In another instance of purported unsuitable recommendations, FINRA Enforcement determined that a WIS customer with a net worth of $200,000 and an investment objective of growth and a conservative risk profile was also purportedly steered into five Non-Traditional ETFs. As alleged by FINRA, this investor held the Non-Traditional ETFs for an average of 350 days, resulting in a net loss of $32,865.

Brokerage firms like WIS 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.

The attorneys at Law Office of Christopher J. Gray, P.C. have significant experience in representing investors who have incurred losses in connection with various alternative investments, including leveraged and inverse ETFs, as well as various active investment strategies. Investors may contact our office at (866) 966-9598 or via email at newcases@investorlawyers.net for a no-cost, confidential consultation.

According to the claim, the woman was sold non-traded REITs and other alternative investments by Jonathan Pyne, a broker for Berthel Fisher. The claim argues that her age and low risk tolerance made the investments unsuitable for her. The investments included:

• Inland American Real Estate Trust
• Wells REIT
• Cornerstone Core Properties REIT
• Gulf Coast Rig & Equipment
• REEF Oil & Gas Income and Development
• Leaf Equipment Leasing Income Fund III

Securities arbitration lawyers say that these investments are illiquid and, in many cases, may have been negligently misrepresented. In this woman’s case and possibly many others, the investments also allegedly represented a concentration level of her liquid net worth that was too large to be suitable.

Firms have an obligation to properly supervise their brokers and fully disclose all the risks of a given investment when making recommendations, and those recommendations must be suitable for the individual investor receiving the recommendation given their age, investment objectives and risk tolerance.

Non-traded REITs are attractive to investors because they carry a relatively high dividend or interest. According to investment fraud lawyers, however, these investments are inherently risky and illiquid, which limits access of funds to investors and makes them unsuitable for many individuals with conservative risk tolerances and those who need easy access to funds, especially when over-concentrated. Leveraged and inverse ETFs are designed to meet daily objectives, and “reset” each day. As a result, the performance of these investments can diverge from the performance of the underlying benchmark or index very quickly, and the problem is exasperated in volatile markets, making these investments unsuitable for many investors as well.

If you were sold unsuitable alternative investments from a Berthel Fisher broker, including non-traded REITs, inverse and leveraged ETFs and/or Oil & Gas Partnerships, you may be able to recover your losses through a securities arbitration claim. To find out more about your legal rights and options, contact a securities arbitration lawyer at Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or newcases@investorlawyers.net for a no-cost, confidential consultation.