FSC Securities Fined Over Failure to Supervise ETF Sales
The Financial Industry Regulatory Authority (FINRA) has filed a settlement with FSC Securities Corporation that requires the firm to a pay a $100,000 fine. The company was accused of failing to supervise the trading of risky, nontraditional, exchange-traded funds (ETFs). The settlement also requires FSC to reimburse $492,485 to customers who lost money in the ETFs.
FSC agreed to pay the fine without admitting or denying the allegations. FINRA alleges that FSC allowed its brokers to recommend that customers buy leveraged and inverse ETFs without establishing a supervisory system capable of ensuring that those recommendations were suitable. FINRA claims that as a result, FSC representatives were recommending unsuitable, high-risk funds to customers with conservative or moderate risk tolerances.
Leveraged ETFs and inverse leveraged ETFs are risky, complex securities that many brokers and investors do not fully understand. As a result, many brokerage firms forbid their brokers from recommending the securities to retail investors.
According to FINRA, FSC executed 6,500 purchases of leveraged, inverse, or both inverse and leveraged ETFs in roughly 1,400 customer accounts between January 2009 and September 2014. The total purchased was $92 million, which earned the company approximately $603,000 in commissions.
FINRA accused FSC of failing to establish and maintain a reasonable supervisory system, including Written Supervisory Procedures (WSPs) designed to monitor the recommendations.
In June 2009, FINRA issued a regulatory notice regarding nontraditional ETFs, noting that if held for long periods of time, the funds can diverge from their benchmark, making them unsuitable for clients who hold them for more than one trading session.
Despite the FINRA notice, FSC did not prohibit brokers from recommending the risky, nontraditional ETFs. It wasn’t until 2012 that FSC implemented a monthly reporting system monitoring the trades, though it still failed to explain to advisors how to evaluate the risks. In October 2014, FSC ultimately restricted the purchase of all leveraged and inverse ETFs, allowing trades only in limited circumstances.
FSC Securities Under FINRA Watch
Atlanta-based FSC Securities Corp. is a securities broker-dealer with operations in all fifty states that is licensed with both the Securities and Exchange Commission (SEC) and FINRA. Since entering the industry, FSC has had 21 regulatory events and 14 arbitrations that resulted in an award. The firm was subject to several notable FINRA investigations over the past few years.
FINRA Actions Relating to ETF Investments
FINRA has brought several cases over ETF investments against companies including Oppenheimer & Co. Inc. and LPL Financial LLC. In both cases, FINRA found an absence of compliance efforts at each firm and required both settlement fines and restitution payments. In the case of LPL, the firm agreed to pay a $10 million fine and $1.66 million in restitution to customers who purchased nontraditional ETFs.
In February 2017, the SEC fined Morgan Stanley $8 million, forcing it to admit wrongdoing for failing to ensure clients understood the risks associated with buying inverse ETFs.
Did You Lose Money to FSC Securities?
If you believe you have been the victim of stockbroker or brokerage misconduct, you may have certain legal rights that require your immediate attention.
Call an Investment Fraud Attorney Today
If you are looking for an investment fraud attorney to review your rights and options, the investment fraud lawyers at Dimond Kaplan & Rothstein, P.A. have recovered more than $100 million from banks and brokerage firms for their wrongful actions. DKR has helped investors recover investment losses suffered in in unsuitable ETFs.