The Financial Industry Regulatory Authority has fined Stirlingshire Investments $40,000 for failing to have policies and procedures in place with respect to its recommendations of inverse or leveraged exchange-traded funds, or NT-ETFs, and to supervise such recommendations, which violated Regulation Best Interest.
According to FINRA's order, from November 2022 through April 2024, Stirlingshire violated Reg BI and FINRA Rules 3110 and 2010 by failing to establish, maintain and enforce a reasonable supervisory system, including written procedures, concerning recommendations of NT-ETFs.
During the time period, "three Stirlingshire registered reps recommended that more than 25 retail customers purchase NT-ETFs, yet the firm failed to establish, maintain, and enforce written policies or procedures reasonably designed to achieve compliance with Reg BI's Care Obligation with respect to its recommendations of NT-ETFs, and to supervise such recommendations," the order states.
From June 2022 through December 2023, Stirlingshire also failed to file with FINRA offering materials for two private placement offerings issued by the firm's parent company.
Stirlingshire, a full-service brokerage, is headquartered in New York and has one branch office and about 26 registered reps.
As FINRA explains, NT-ETFs are complex financial instruments designed to return a multiple of the performance of an underlying index or benchmark, the inverse of the benchmark, or both, usually over the course of a single day.
In adopting Reg BI, the Securities and Exchange Commission cautioned that "broker-dealers recommending such products should understand that inverse and leveraged exchange-traded products that are reset daily may not be suitable for, and as a consequence also not in the best interest of, retail customers who plan to hold them for longer than one trading session, particularly in volatile markets,'" the order states.
The firm's WSPs "prohibited purchases of NT-ETFs in customer accounts and instructed supervisors to cancel all NTETF purchases in customer accounts, however the firm did not enforce that prohibition, nor did it put in place any alerts, exception reports, or other supervisory tools or procedures to identify and review NT-ETF recommendations," FINRA said.
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