FINRA Fines Stifel Nicolaus for Non-Traditional ETF Failures
Published On: April 16, 2024

FINRA Hits Stifel Nicolaus with Almost $3 Million in Fines and Restitution As a Result of the Firm’s Repeated Failures Related to Non-Traditional Exchange-Traded Investments

Stoltmann Law Offices, P.C. is a Chicago-based securities, investment fraud, and investor rights law firm that offers victims representation on a contingency fee basis nationwide.  Few firms across the nation have represented more investors against Stifel Nicolaus than our team.  Since 1999, our attorneys have brought every kind of investor claim against Stifel. We have aggressively prosecuted countless trading, suitability, and illegal outside business/selling away claims against Stifel.  Since its passage in June 2020, we have also pursued investor claims against Stifel under Regulation Best Interest.

On March 26, 2024, it was reported the FINRA – the Financial Industry Regulatory Authority – fined St. Louis-based Stifel Nicolaus nearly $3 million in connection with the firm’s inability to adequately supervise recommendations for clients to invest in complex non-traditional exchange-traded products.

FINRA Fine Against Stifel was Due to Stifel’s Compliance and Supervisory Failures Specific to Risky Alternative Products – Again

The FINRA sanctions against Stifel were in connection with compliance failures related to the soliciting clients to invest in complex and risky alternative exchange traded investments. FINRA came down particularly hard, because this is the second time the company has been whacked by the regulator for failing to adequately supervise these recommendations.  In January 2014 – over ten years ago – Stifel was fined $550,000 and ordered to pay restitution in the amount of $474,613 to impacted customers – due to the firm’s compliance failures involving non-traditional exchange-traded funds. (AWC No. 2012034576901).

The more things change, the more they stay the same. In FINRA AWC No. 2019061350401, FINRA made very similar allegations against Stifel’s compliance and supervision department. This time, FINRA alleged that Stifel failed to maintain, establish, and enforce written supervisory procedures reasonably designed to achieve compliance with their suitability obligations in connection with transactions involving NT-ETFs and other non-traditional exchange-traded products.  According to FINRA these NT-ETPs are complex investments designed to be held for short periods of time – they are trading vehicles designed for traders – and are not intended to be held long-term. A recommendation to buy and hold one of these ETPs or NT-ETFs is a recommendation to lose money. FINRA considered these recommendations and the compliance failures attached to them to be violations of NASD Rule 3010, FINRA Rules 3110 and 2010.

The Investments At Issue in the Stifel Case – Non-Traditional ETFs and ETPs are Designed for Day-Traders, Not Buy-Hold Investors

Even though FINRA made it clear in Regulatory Notice 09-31 that these leveraged/multiplier ETFs are not designed to be held long-term, and sometimes not even more than one trading day, FINRA firms keep looking the other way and as their financial advisors recommend these investments as a way to juice returns. The problem with a buy and hold strategy for a 2X or 3X ETF, is that over the long-term, the product will not perform as you may expect.  The reason for this is, the underlying portfolio used by these products rebalances and resets, moving the dial on the starting point for the underlying asset, which is usually an index.

Its not just FINRA that has educated its members about how these products work.  The products themselves make it clear in their prospectuses that they are not designed for long-term investing.  They are trading vehicles, making them only suitable for investors seeking to speculate, market-time, and day-trade.

Leveraged ETFs Are High Risk

Leveraged ETFs Are High Risk/High Reward Bets on Which Way the Market is Going to Move on a Day-to-Day Basis

If your financial advisor solicited you to invest in leveraged ETFs, like those offered by Rydex, ProFunds, or Direxion, to name just three of the dozens out there, then you better be up for speculation and the risk of total loss – especially if your advisor then fails to close out or sell your position within days.  If not, and you were never advised by your financial advisor of the risk inherent in investing in leveraged ETFs or ETPs, and you lost money as a result, you could have a viable claim for recovery through FINRA Arbitration.  These investments are designed to return a multiple (typically either 2 times or 3 times) either concurrent or inverse (the opposite) of whatever index or investment it is linked to. For example, if you invest in a leveraged ETF that is 2X the DOW 30, and the DOW has a positive 1% return that day. Your return would be 2%.  But if you continue to hold the investment thinking that it will continue to double the return of the DOW 30 on a daily basis, you will come to learn within a few weeks that these products do not track that way and you are almost certain to lose money if you hold, no matter how the DOW 30 actually performs.

After June 2020, Regulation Best Interest requires all financial advisors to only make recommendations that are in the best interest of their clients. It is akin to a fiduciary duty.  One of the Regulation Best Interest duties is the Care Obligation. This requires the financial advisor and the firm to understand, fundamentally, the investments they recommend.  That seems like common sense, how can an advisor or firm recommend an investment if they don’t understand it? Buying and then holding leveraged ETFs and ETPs would be a very clear violation of Regulation Best Interest, because it would be an admission that no one involved in the transactions understood the product being offered and sold.

What Should I Do if My Financial Advisor Sold Me Leveraged ETFs and I lost Money Because of It?

If you were solicited to invest in leveraged ETFs or ETPs and lost money as a result, you should call Stoltmann Law Offices, P.C. at 312-332-4200 for a no-obligation, initial consultation with an experienced securities arbitration attorney.  We are a contingency fee law firm which means we do not get paid unless you do.

Disclaimer

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