December 12, 2013
On Wall Street, a little discretion can sometimes go a long way -- perhaps even leading to a regulatory fine and suspension. Then there's that whole dispute between the industry and its regulators as to whether it's okay or not okay or sort of okay or sort of not okay to recommend leveraged exchange traded funds ("ETFs"). In today's BrokeAndBroker blog we examine one regulatory settlement involving both the use of discretion and leveraged ETFs.
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Stuart A. Epley submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Stuart A. Epley, Respondent (AWC 2012032504801, December 3, 2013).
In 1998, Epley entered the securities industry and from 2009 until he was permitted to resign on May 2, 2012, he was registered with FINRA member firm Ameriprise Financial Services, Inc. The AWC asserts that he had no prior disciplinary history.
Starting around March 2010 through April 2012, Epley allegedly executed 87 transactions in eight customer accounts without obtaining prior written authorization from the customers and without having the accounts accepted as discretionary by his firm. At the times of the cited transaction, the firm did not permit discretionary trading with the exception of very limited use of time and price discretion.
Getting Some Leverage
The AWC further alleges that around April 2011 through January 2012, Epley mismarked 24 order tickets in eight customer accounts in order to facilitate the purchase of leveraged ETFs. Although he had solicited the trades, Epley purportedly marked them as "Unsolicited." At the relevant times, the firm's policies prohibited registered representatives from recommending leveraged ETFs. As a consequence of the mismarked order tickets, Epley caused the firm's books and records to be inaccurate.
SIDE BAR: In order to better understand the issues in this matter, read:
Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track-or both-are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.
This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met. . .
In accordance with the terms of the AWC, FINRA imposed upon Epley a three month suspension in all capacities with any FINRA member firm. The AWC asserts that no monetary sanction was imposed because of Epley's September 30, 2013, Chapter 7 bankruptcy petition.