On May 1, 2018, FINRA Department of Enforcement entered into a settlement via Acceptance, Waiver, and Consent (AWC) with Respondent Laidlaw & Company. Without admitting or denying any wrongful acts, Laidlaw consented to a public censure by FINRA, the imposition of a $25,000 fine, as well as agreeing to give FINRA a written statement saying that systems mentioned in the AWC are designed to achieve compliance with “applicable securities laws, regulations, and rules.
FINRA Enforcement alleged that from April 2014 through December 2015, Laidlaw did not establish and maintain a supervisory system and written supervisory procedures (WSPs) designed to ensure that recommendations of leveraged and inverse exchange traded funds (Non-Traditional ETFs) complied with applicable securities laws and FINRA rules.
Non-Traditional ETFs are risky financial products because they are designed to return a multiple of an underlying benchmark or index over the course of a trading session. They are not intended to be held for more than a single trading session. FINRA Regulatory Notice 009-31 states “The performance of Non-Traditional ETFs over periods of time longer than a single trading session can differ significantly from the performance of their underlying or benchmark during the same period of time.”
Due to the risks in Non-Traditional ETFs, FINRA has advised broker-dealers and their representatives that Non-Traditional ETFs are not suitable for investors who plan to have them for more than one trading session.
FINRA alleges that Laidlaw registered representatives completed 869 purchases and 946 sales of Non-Traditional ETFs across 312 customer accounts. Their sales total approximately $32,000,000 in transactions. FINRA has stated that Laidlaw’s own compliance systems, including its WSPs, did not need supervisors to review open positions in Non-Traditional ETFs held for extended periods or resulting in unrealized losses. The systems did not impose product-specific limitations on representatives being able to recommend Non-Traditional ETFs. Because of these alleged acts, FINRA Enforcement alleged that Laidlaw’s insufficient supervisory system gave rise to violations of FINRA Rules 3110 and 2010.
Firms like Laidlaw are obligated under NASD Rule 2310 and FINRA Rule 2111 to have reasonable diligence to understand the nature of the recommended security. This means that a firm must understand the terms and features of the funds, including how they are meant to perform and how they impact the market.
Silver Law Group is a nationally-recognized securities law firm headquartered in South Florida representing investors worldwide with their claims for losses due to securities and investment fraud. Silver Law Group is investigating potential claims relating to investments in MabVax Therapeutics, Spherix, Relmada Therapeutics, PolarityTE, Inc. and Protea. The firm has successfully recovered multi-million dollar awards for its clients through securities arbitration and the courts. To contact Scott L. Silver to discuss your legal matter, call toll-free (800) 975-4345 or e-mail him at SSilver@silverlaw.com.