The Securities and Exchange Commission today filed settled charges against three investment advisory firms and two dually registered firms for unsuitable sales of complex exchange-traded products to retail investors.
The SEC filed the actions against 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.
More than $3 million will be returned to harmed retail investors as part of the first case, which the SEC said resulted from an enforcement initiative that uses trading data analytics to uncover potential unsuitable sales.
All five actions concern sales of volatility-linked exchange-traded products designed for the short term, but which were sold to clients as long-term holdings. The value of these products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the CBOE volatility index, the SEC said.
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 said.
“Contrary to warnings in offering documents, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances for months and years,” the SEC said.
"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," Stephanie Avakian, director of the SEC's Division of Enforcement, said. "We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments."
The SEC’s investigation and monitoring for unsuitable sales of complex products is continuing, the SEC said. “These cases demonstrate the importance of data analytics in our efforts to surveil the market and pinpoint unsuitable sales of complex financial products,” said Daniel Michael, chief of the Enforcement Division’s Complex Financial Instruments Unit. “We will continue to use these tools to protect retail investors.”
The orders against each of the firms find that they failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules.
The SEC also found that American Portfolios failed to reasonably supervise certain brokerage reps who recommended their customers buy and hold volatility-linked products.
The order against Benjamin Edwards finds that the firm failed 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.
The agency's Exchange-Traded Products Initiative is led by the Division of Enforcement's Complex Financial Instruments Unit, according to the SEC.