5 Firms Charged with Exchange-Traded Products Violations

The SEC charges 3 RIAs and 2 Broker-dealers with Unsuitable Sales of Complex Exchange-Traded Products

According to a press announcement on November 13, the Securities and Exchange Commission reportedly settled actions against three investment advisory firms and two dually-registered broker-dealer and advisory firms for alleged violations that related to unsuitable sales of complex exchange-traded products to retail investors.

The five firms who were charged, 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.,  will return of over $3 million to harmed investors, according to the SEC.

The five actions are in connection with the sales of volatility-linked exchange-traded products between January 2016 and April 2020.  According to the SEC’s orders, the value of the products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the CBOE volatility index. The SEC notes 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.

The SEC finds that despite the warnings, and without understanding the products, representatives of the firms purportedly recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. Further, the firms allegedly failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products.

These are reportedly the first actions of The SEC’s Division of Enforcement’s Exchange-Traded Products Initiative, which used trading data analytics to uncover potential unsuitable sales.

The regulator says it will “continue to look for sales that expose customers to unsuitable investments.”The SEC finds that each of the firms purportedly failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules.

Further, American Portfolios allegedly failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product. Benjamin Edwards was also charged with  failure to reasonably supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked 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.

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