Chicago-based Stoltmann Law Offices has represented investors who’ve suffered losses from dealing with brokers selling unsuitable Exchange Traded Products (ETPs). When a broker sells you a product that is “guaranteed” to make money during volatile markets, there’s no downside for the person selling the vehicle. They always make money on investors’ fear and ignorance.
A prime recent example is the widespread sale of volatility-linked Exchange-Traded Products. While these vehicles may make money in the short term when the stock market turns bearish, they can lose money in the long run, which brokers may not disclose. Volatility ETPs are linked to “fear” indexes like the CBOE Volatility Index, or VIX, a short-term gauge of downside activity. When the market dips, they can increase in value.
Average investors, however, get burned when they hold onto fear indexes. Brokers who sold these products know that, but often don’t get clients out before they lose money. The U.S. Securities and Exchange Commission (SEC) recently cracked down on broker-dealers who sold these vehicles to unsuspecting investors.
The SEC recently settled actions against five broker-dealer and advisory firms in connection with the “Exchange Traded Products Initiative,” a crackdown on abusive ETP sales. The settlement will result in the return of some $3 million to investors from American Portfolios Financial Services/American Portfolios Advisors Inc.; Benjamin F. Edwards & Company Inc.; Royal Alliance Associates Inc.; Securities America Advisors Inc., and Summit Financial Group Inc.
In their investigation, the SEC found that “the offering documents for the products made clear that the short-term nature of these products made investments in the products more likely to experience a decline in value when held over a longer period.” Despite these clear warnings, brokers “recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. The orders further find that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products.”
Without admitting or denying the findings, “each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.”
Have you invested with brokers who have sold you an unsuitable ETP? FINRA and the SEC have strict rules on disclosing risk profiles on all investments sold by brokers and investment advisers. One good way of telling whether you were sold one of these products is whether they pass the sniff test: Are they pushed aggressively by the broker? Did they fully explain the downside risks? Are they right for you and your risk tolerance?
Firms are also legally required by FINRA to monitor and supervise what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Investors can file FINRA arbitration complaints if these rules are broken.
If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!
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