Two related brokerage firms–Stifel, Nicholas & Company, Incorporated and Century Securities Associates, Inc.–entered into a settlement with the Financial Industry Regulatory Authority (FINRA) over alleged misconduct in the sales of leveraged and inverse exchange traded funds (ETFs). As part of the settlement, Stifel and Century agreed to pay fines totaling $550,000 and to make restitution totaling $474,613 to a select group of 65 customers who were sold ETFs between January 1, 2009 and June 1, 2013. Presumably, the group of customers chosen to receive redemption consists of customers who had selected a conservative investment objective and had held the ETFs for an unreasonable period of time. In its written findings, FINRA provided a brief description of two customers that are entitled to redemption:
- A Stifel customer with a primary investment objective of “income” who invested in a nontraditional ETF and held if for 18 months that lost $41,000.
- A Century customer with a primary investment objective of “income” who invested in a nontraditional ETF and held if for 2 ½ years that lost $13,600.
More Than Just 65 Customers May Have Been Damaged
It isn’t clear whether the group of customers entitled to automatic redemption under the settlement was limited to those who had “income” selected as their primary investment objective. What about other risk averse investors whose stated objective reflected something that was a notch or two above income? Stifel currently offers four investment objectives and six categories of risk tolerance:
Stifel Investment Objectives
- Growth & Income
- Speculation/Active Trading/Complex Strategies
Stifel Risk Tolerance Categories
- Moderately Conservative
- Moderate Growth
- Moderately Aggressive
According to FINRA, during the period in question, Stifel and Century collectively sold over $670 million worth of nontraditional ETFs to their customers. Leveraged and inverse ETFs are exceptionally risky investment products that are unsuitable for most investors who have no desire to engage in an aggressive and speculative trading strategy. Click here for more blog postings about the risks and pitfalls of investing in leveraged and inverse ETFs. My guess is that the number of affected investors goes well beyond the 65 “conservative investors” included in the Stifel and Century’s settlement with FINRA. Investors left out of the settlement always have the option of pursuing an individual claim for damages through FINRA’s securities arbitration program. For more information about securities arbitration, click here.