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FINRA Fines Oppenheimer Nearly $3M on Leveraged ETF Violations

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Leveraged ETFs continue to be in regulators’ crosshairs.

The Financial Industry Regulatory Authority said Wednesday that it has fined Oppenheimer & Co. Inc. $2.25 million and ordered the firm to pay restitution of more than $716,000 to affected customers for selling leveraged, inverse and inverse-leveraged exchange-traded funds to retail customers without reasonable supervision, and for recommending these non-traditional ETFs that were not suitable.

FINRA notes that while Oppenheimer instituted policies in August 2009 prohibiting its representatives from soliciting retail customers to purchase non-traditional ETFs, and also prohibiting them from executing unsolicited non-traditional ETF purchases for retail customers unless the customers met certain criteria, e.g., the customer had liquid assets in excess of $500,000, the BD failed to “reasonably enforce these policies.”

Oppenheimer instituted the policies in August 2009, in response to FINRA Regulatory Notice 09-31, which advised broker-dealers of the risks and inherent complexities of certain non-traditional ETFs.

But because Oppenheimer failed to enforce the policies, its reps continued to solicit retail customers to purchase non-traditional ETFs and continued to execute unsolicited non-traditional ETF transactions even though the customers did not meet Oppenheimer’s stated criteria, FINRA states.

From August 2009 through September 2013, more than 760 Oppenheimer reps executed more than 30,000 non-traditional ETF transactions totaling approximately $1.7 billion for customers.

“Written procedures are worthless unless accompanied by a program to enforce them,” said Brad Bennett, FINRA’s executive VP and Chief of Enforcement, in a statement. “While Oppenheimer’s procedures prohibited solicitation of non-traditional ETFs, the absence of any meaningful compliance effort resulted in its representatives continuing to solicit unsuitable non-traditional ETF purchases, including a number involving elderly investors.”

Securities and Exchange Commission Chairwoman Mary Jo White noted at the recent Investment Company Institute annual meeting in Washington that the SEC is also scrutinizing ETFs.

Ron DeLegge, founder of, told ThinkAdvisor Wednesday that the SEC, in any rulemaking the agency may undertake, needs to “do a better job at clarifying how these [leveraged ETF] products are labeled, especially with double- and triple-label products.”

Says DeLegge: “There has to be regulatory work done to bring uniformity to how leveraged ETFs are labeled by the industry.”

Also, DeLegge argues that “leveraged ETFs are okay to use, but in the right context–within a personal tactical, non-core investment portfolio—that’s the proper context. When you use them in any other context, in the core portfolio, which is more conservative, long term … that’s when advisors get into trouble.”

FINRA found that Oppenheimer did not establish an adequate supervisory system to monitor the holding periods for non-traditional ETFs. And that the firm “failed to employ any surveillance or exception reports to effectively monitor the holding periods for non-traditional ETFs, so certain retail customers held non-traditional ETFs in their accounts for weeks, months and sometimes years, resulting in substantial losses.”

FINRA also found that Oppenheimer failed to conduct adequate due diligence regarding the risks and features of non-traditional ETFs and, as a result, did not have a reasonable basis to recommend these ETFs to retail customers. Similarly, Oppenheimer reps solicited and effected non-traditional ETF purchases that were unsuitable for specific customers. For example:

  • An 89-year conservative customer with annual income of $50,000 held 96 solicited non-traditional ETF positions for an average of 32 days (and for up to 470 days), resulting in a net loss of $51,847.
  • A 91-year conservative customer with an annual income of $30,000 held 56 solicited non-traditional ETF positions for an average of 48 days (and for up to 706 days), resulting in a net loss of $11,161.
  • A 67-year conservative customer with an annual income of $40,000 held two solicited non-traditional ETF positions in her account for 729 days, resulting in a net loss of $2,746.  

In concluding the settlement, Oppenheimer & Co. Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

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