Sterne Agee Financial Sanctioned Over Mismarked Non-Traditional ETF Trades

The Financial Industry Regulatory Authority (FINRA) fined ( Case No. 2013038830502) brokerage firm Sterne Agee Financial Services, Inc., (Sterne Agee) concerning allegations between May 2010 through October 2013, one of Steme Agee's brokers mismarked approximately 966 order tickets as "unsolicited" when the orders were solicited trades. FINRA found that Steme Agee failed to detect the mismarked tickets and failed to enforce its written supervisory procedures prohibiting solicitation leveraged non-traditional exchange traded funds (Non-Traditional ETFs).

Steme Agee has been FINRA member since 1986 with its main office located in Birmingham, Alabama. Sterne Agee has 365 branch office locations and employs 598 registered representatives.

According to FINRA, Sterne Agee maintained written supervisory procedures that prohibited its brokers from soliciting transactions in inverse or leveraged ETFs due to the unique properties of these products. Nonetheless, from approximately May 2010 through October 2013, a Sterne Agee broker known only by the initials “PC" solicited a total of 966 transactions in Non-Traditional ETFs in contravention of the firm's policies. FINRA found that PC mismarked all of the order tickets as "unsolicited" in order to avoid the firm’s requirements when PC had in reality solicited each order.

FINRA found that the majority of transactions involved only four different securities that were purchased across 26 different customer accounts. FINRA found that despite the occurrence of almost 1000 transactions in a limited number of Non-Traditional ETFs, Sterne Agee never investigated whether the transactions were actually unsolicited. Accordingly, FINRA found that Sterne Agee mismarked numerous order tickets as "unsolicited" when the orders were "solicited” causing Sterne Agee's books and records to be inaccurate.

Non-Traditional ETFs behave drastically different and have different risk qualities from traditional ETFs. While traditional ETFs seek to mirror an index or benchmark, Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets, often attempting to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs are also used to earn the inverse result of the return of the benchmark.

However, the risks of holding Non-Traditional ETFs go beyond merely multiplying the return on the index. Instead, Non-Traditional ETFs are generally designed to be used only for short term trading as opposed to traditional ETFs. The use of leverage employed by these funds causes their long-term values to be dramatically different than the underlying benchmark over long periods of time. For example, between December 1, 2008, and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index's daily return fell six percent. In another example, the ProShares UltraShort Oil and Gas, seeks to deliver twice the inverse of the index's daily return fell by 26 percent over the same period.

Because of these risks, The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and FINRA has stated that Non-Traditional ETFs are typically not suitable for most retail investors. Consequently these funds typically have very limited uses and in many cases are completely inappropriate for retail investors who have long term objectives. Increasingly, brokerage firms are prohibiting the solicitation of these investments to its customers due to suitability concerns.

Investors who have suffered losses may be able recover their losses through securities arbitration. The investment attorneys at Gana LLP are experienced in representing investors in cases where their broker has acted inappropriately. Our consultations are free of charge and the firm is only compensated if you recover.