LPL Financial Advisor Michael Taillon: Another Example of Failed Supervision for Wary ETF Investors

In December 2013, FINRA levied two more fines against brokerage firms, who agreed to settlements under Letters of Acceptance, Waiver and Consent (AWC) with the FINRA’s Department of Enforcement. Stifel Nicolaus & Company was fined $1 million and J.P. Turner & Company was fined over $700,000 (in part for the sale of ETFs) over allegations related to the sale of non-traditional, leveraged and inverse, ETFs to retail investors.

Brokerage firms continue to receive attention from regulators for failure to supervise the unsuitable investment advice given by financial advisors to retail investors concerning non-traditional exchange traded Funds (ETFs). LPL Financial, LLC is a major national brokerage firm whose business model includes the licensing of financial advisors through the U.S. in small, and sometimes single-person, branch office locations. Silver Law Group currently represents a retired investor in a FINRA arbitration claim against LPL Financial, LLC and Michael Taillon, a former registered representative from a single-person branch office in Meadows of Dan, Virginia.

The FINRA arbitration claim alleges violations of sales practice rules and regulations as outlined in Notice to Members 09-31 , which is related to the sale of non-traditional, leveraged and inverse, exchange traded funds. Silver Law Group is currently investigating claims of FINRA sales practice violations related to recommended investments in non-traditional ETFs against Michael Taillon and financial advisors throughout the U.S. According to the FINRA claim filed in December 2013, unsuitable investment recommendations were made in the following leveraged and inversely correlated exchange traded funds:

• Rydex Inverse S&P 500 Strategy (RYARX);
• Rydex S&P 500 (RYSOX);
• ProShares Short S&P 500 (SH);
• ProShares UltraShort Real Estate (SRS);
• ProShares UltraShort Oil & Gas (DUG);
• ProShares UltraShort Financial (SKF);
• ProShares UltraShort Basic Materials (SMN);
• ProShares Ultra S&P 500 (SSO);
• ProShares Ultra Basic Materials (UYM); and
• ProShares Ultra QQQ (QLD).

Michael Taillon’s registration with LPL Financial, LLC was terminated in January 2014. Non-traditional exchanged traded funds are investments designed to achieve investment returns that are a multiple (leveraged) of an underlying benchmark or the inverse (negative correlation) to an underlying benchmark. The leveraged or inverse ETFs are designed to track an underlying basket of securities, indexes, currencies or commodities. In order to achieve these investment results derivatives, swaps and futures contracts must be used which makes non-traditional ETFs complex investments that are rarely understood by the financial advisors who recommend them.

Non-traditional ETFs use derivatives, swaps and futures contracts to accomplish the intended performance objectives and requires a daily reset of the portfolio holdings which results in a tracking error over time. In other words, most non-traditional ETFs are only managed to meet the investment objectives on a daily basis. Due to the tracking errors over time and the effects of leverage, the performance of an ETF can differ greatly from the performance of the underlying basket of securities, indexes, currencies or commodities. According to a FINRA regulatory notice, “While the customer-specific suitability analysis depends on the investor’s particular circumstances, inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.” For buy-and-hold investors, non-traditional exchange traded fund investments have experienced investment results much different from the projections made by their financial advisors.

FINRA warns brokerage firms and financial advisors that they may violate suitability obligations when making investment recommendations when the financial advisors “a reasonable basis” for making any recommendations about non-traditional ETFs. Financial advisors do not fully understand the intended use of non-traditional, leveraged and inverse, ETFs and the investment advice given to their clients because they have not received the proper training in these complex investment products.

Silver Law Group is currently investigating whether major Wall Street firms are in compliance with the securities industry’s rules and regulations concerning the unsuitable investment advice related to investments in exchange traded funds. The focus of the investigation includes whether retail investors held ETFs, leveraged or inversely correlated, to an underlying basket of securities, indexes, currencies or commodities, over extended periods of time, which resulted in damages.