The Financial Industry Regulatory Authority (FINRA) has fined Oppenheimer & Co USD2.25 million and ordered the firm to pay restitution of more than USD716,000 to affected customers for selling leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) to retail customers without reasonable supervision, and for recommending non-traditional ETFs that were not suitable.
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, Oppenheimer instituted policies prohibiting its representatives from soliciting retail customers to purchase non-traditional ETFs, and also prohibited them from executing unsolicited non-traditional ETF purchases for retail customers unless the customers met certain criteria, eg, the customer had liquid assets in excess of USD500,000. Oppenheimer, however, failed to reasonably enforce these policies; thus, representatives 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. From August 2009 through 30 September, 2013, more than 760 Oppenheimer representatives executed more than 30,000 non-traditional ETF transactions totalling approximately USD1.7 billion for customers.
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, says: "Written procedures are worthless unless accompanied by a program to enforce them. 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.”
In addition, FINRA found that Oppenheimer did not establish an adequate supervisory system to monitor the holding periods for non-traditional ETFs. 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 representatives solicited and effected non-traditional ETF purchases that were unsuitable for specific customers.
In concluding this settlement, Oppenheimer & Co. Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
