Cetera Financial Group broker-dealer Summit Financial Networks and Advisor Group BDs Royal Alliance Associates and Securities America Advisors were among five firms the Securities and Exchange Commission charged with making unsuitable sales of complex exchange-traded products to retail investors.
All five firms on Friday settled the claims for a combined total of $3 million that will be returned to harmed investors, according to separate SEC orders.
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, the SEC said.
Holbrook, New York-based American Portfolios and St. Louis, Missouri-based Benjamin Edwards each agreed to pay a civil penalty of $650,000, while La Vista, Nebraska-based Securities America and Boca Raton, Florida-based Summit each agreed to pay a civil penalty of $600,000 and Jersey City, New Jersey-based Royal Alliance agreed to pay a civil penalty of $500,000.
In a statement provided to ThinkAdvisor on Monday, Cetera said: “The matter, a historical one dating back to 2017, is part of a coordinated effort with several RIA firms involving volatility-linked ETF products, which SFG has since banned. The matter has been promptly settled by SFG in full cooperation with and to the satisfaction of the SEC.”
American Portfolios, meanwhile, was “happy to cooperate with the SEC to put this matter behind us,” according to Craig Vollono, that firm’s general counsel and executive vice president. “We remain focused on serving our clients and continuously enhance our policies and procedures in order to help protect the investing public,” he said.
Benjamin Edwards declined to comment and a spokesperson for Advisor Group could not immediately be reached for comment.
The sales occurred between January 2016 and April 2020, the SEC said, noting the actions were the first arising from investigations generated by its Division of Enforcement’s Exchange-Traded Products Initiative, that used trading data analytics to uncover potential unsuitable sales.
The five actions involved sales of volatility-linked exchange-traded products, the SEC noted. As set forth in the orders, the value of the products attempted to track short-term volatility expectations in the market that are typically measured against derivatives of the CBOE volatility index.
According to the orders, the offering documents for the products made clear that the short-term nature of the products sold made investments in the products more likely to experience a decline in value when held over a longer period, the SEC alleged.
The orders found that, contrary to the warnings, and without understanding the products, representatives of the five firms recommended their clients buy and hold the products for longer periods, including in some circumstances, for months and years, according to the SEC.
The orders also found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products, the SEC alleged.
“It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk,” according to Stephanie Avakian, director of the SEC’s Division of Enforcement. “We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments,” she said in a statement.
The orders against each of the firms found they failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules.
The order against American Portfolios additionally found that firm failed to reasonably supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product.
The order against Benjamin Edwards, meanwhile, additionally found that firm failed to reasonably supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products.