FINRA slapped Infinex Investments with a $75,000 fine for selling unsuitable exchange-traded funds to customers.
From April 2009 through March 2011, the broker-dealer allowed 35 registered reps to recommend to customers inverse and inverse-leveraged ETFs without performing reasonable diligence to understand the risks associated with them, according to FINRA.
Infinex failed to subject non-traditional ETFs to the same level of review as other new products offered for sale to retail brokerage customers, FINRA wrote in its settlement letter with the firm.
Unlike leveraged ETFs, which aim to deliver multiples of the performance of the index or benchmark they track, inverse ETFs seek to deliver the opposite of the performance of the index. Inverse-leveraged ETFs are those that are both inverse and leveraged, meaning they seek to achieve a return that is a multiple of the inverse performance of the underlying benchmark.
According to FINRA, the reps had not been properly trained on the complex non-traditional ETF products. The reps recommended the products to 229 customers, involving approximately 835 transactions, according to FINRA.
In addition to failing to pursue reasonable diligence to understand the products, the reps made recommendations deemed unsuitable given the risk profile of some of the customers. More than one in three of the 229 customers (87 customers) had conservative investment objectives and/or risk tolerances and several were elderly, retired customers and/or customers who maintained IRA retirement accounts. One of the customers was 87, while four were in their seventies.
Making matters worse, the ETFs were held much longer than the one-day trading session recommended in their prospectuses. More than half of the customers (143) held the ETFs in their accounts for more than seven business days, with the average holding period exceeding 300 days, according to FINRA.
Seventy customers who had conservative investment objectives and whose ETFs were held for more than seven days lost money on their investments. Customer losses totaled $287,172.
Infinex also failed to establish and maintain an adequate supervisory system, including written supervisory procedures, to monitor and review the sale of non-traditional ETFs to retail customers, FINRA said.
Infinex neither admitted nor denied the charges, but consented to an entry of FINRAs findings.
In addition to the $75,000 fine, Infinex was required to pay restitution to customers in the amount of $287,172.
This settlement allows us to put closure to an issue arising out of our 2011 FINRA cycle exam. Most of the transactions in question took place between four and five years ago, William F. Cummings, senior executive vice president, COO and general counsel of Infinex Financial Group, said in an email.
Cummings noted that Infinex has not allowed its registered representatives to recommend leveraged and inverse ETFs to clients since 2011. We have continued to enhance our training and supervisory policies and procedures and are confident in our ongoing ability to meet our regulatory requirements and our clients investment needs, he said.