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Regulation and Compliance > Federal Regulation

Stifel to Pay $2.3M Over Sales of Complex ETFs

By Dinah Wisenberg Brin

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What You Need to Know

  • The firm's reps routinely recommended long-term holdings of funds that reset daily, FINRA says.
  • Stifel had been fined earlier for failing to keep an adequate system to supervise such sales.
  • Stifel accepted the findings without admitting or denying them.

Stifel Nicolaus and its Stifel Independent Advisors affiliate, both Stifel Financial Corp. subsidiaries, have agreed to pay roughly $2.3 million in fines and restitution to settle misconduct allegations involving sales of complex exchange-traded funds that were intended to be held only a short time.

Due to a lack of oversight, the firm’s representatives were routinely recommending holding the funds for far longer, resulting in nearly $1.3 million in customer losses in 381 accounts, according to the Financial Industry Regulatory Authority.

FINRA this week released the letter in which Stifel consented to FINRA’s findings, without admitting or denying them, and agreed to be censured, pay $1 million in fines and make almost $1.3 million in restitution plus interest to customers.

Repeated Failures

From June 2014 to March 2018, Stifel’s supervisory system was inadequate to meet the firm’s compliance with suitability obligations in connection with recommending non-traditional exchange-traded funds and other non-traditional exchange-traded products to clients, according to FINRA.

This failure occurred despite the Stifel firms in January 2014 signing a similar letter and then taking steps to address their supervision of complex NT-ETP sales, according to the new letter of acceptance, waiver and consent.

In the earlier case, FINRA found Stifel violated industry rules by failing to establish and maintain supervisory systems designed to achieve compliance with suitability obligations in connection with transactions involving non-traditional ETFs. The firms consented to a censure, a $550,000 collective fine and to paying $474,613 in restitution to affected customers at that time.

“During the relevant period, Stifel Nicolaus and SIA … again failed to establish, maintain and enforce supervisory systems, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with their suitability obligations in connection with transactions involving NT-ETFs and other non-traditional exchange-traded products,” the consent letter states.

Complex Products

“NT-ETPs are complex products that are designed to be held for only short periods of time, typically a single day or a single month,” FINRA said. ”Stifel failed to take reasonable steps to detect and address hundreds of potentially unsuitable recommendations that customers buy and hold NT-ETPs for longer periods of time than they were designed to be held, resulting in realized losses for customers.”

The regulator added that Stifel violated FINRA and National Association of Securities Dealers rules.

FINRA has cautioned that, due to compounding, NT-ETPs performance for periods longer than the intended holding period “can differ significantly from the performance … of their underlying index or benchmark during the same period of time” and therefore are “typically are not suitable for retail investors who plan to hold them for more than one trading session,” the authority noted.

‘Product Misuse’

By August 2016, Stifel’s compliance department had discovered that representatives were routinely recommending long-term holding periods for NT-ETPs, a practice that compliance personnel repeatedly referred to as “product misuse,” FINRA found.

In response, the department instituted a “clean-up” effort, but in some instances it was insufficient in preventing representatives from continuing to recommend a strategy of buying and then holding these products for periods well beyond the periods identified in the products’ prospectuses, FINRA said.

“Certain representatives continued to do so until Stifel, Nicolaus prohibited solicited sales of NTETPs. SIA prohibited solicited sales in November 2017 and Stifel Nicolaus did so in March 2018,” the letter says.

Client Losses

As a result of these supervisory failures, the Stifel firms failed to detect or address hundreds of occasions in which their representatives recommended that clients buy and then hold NT-ETPs for potentially unsuitable periods, according to the letter.

“Some of the affected customers were seniors, and many had conservative investment objectives or moderate risk tolerances,” it said.

One 87-year-old client with a conservative risk tolerance purchased a daily reset NT-ETP in August 2015 and held it for 454 days, resulting in a realized loss of approximately $5,000, FINRA said.

A 77-year-oId client with a moderate growth risk tolerance purchased a daily-reset NT-ETP in August 2015 and held it for over a year, resulting in a realized loss of approximately $13,000.

In total, the firms’ representatives recommended at least 438 daily-reset NT-ETP positions that were held for more than seven days, and 45 monthly reset NT-ETPs that were held for more than 60 days, FINRA said.

Dinah Wisenberg Brin

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