Stifel Financial will pay over $2.2 million to repay FINRA fees the firm failed to implement policies to capture inappropriate recommendations by registered representatives for non-traditional exchange-traded products.
Fines follow residence of 2014 knocking Stifel for the same mistakes.
The settlement includes Stifel and Stifel-based independent advisors. Louis, formerly known as Century Securities Associates.
Fees include non-traditional ETPs, which include leveraged and inverse ETPs linked to underlying indices or benchmarks. These vehicles are typically designed to be held for a short period of time, as the negative effects of holding them longer can outweigh the negative performance of any underlying index.
In January 2014, FINRA alleged that Stifel failed to establish and maintain supervisory systems “reasonably designed” to meet compliance obligations related to non-traditional ETPs. The firms agreed to collectively pay more than $1 million in fines and restitution.
According to FINRA, Stifel attempted to correct its actions in the months following the 2014 settlement, including revising their written procedures and installing an automated alert to monitor holding periods for non-traditional ETPs.
However, until Stifel fully implemented the changes in March 2018, firms continued to fail, according to FINRA claims in the settlement announced this week.
The new written procedures acknowledged that the products were complex, risky and “usually not suitable for retail investors”. However, the firms did not ask the supervisors to assess whether the representatives' product recommendations were consistent with the recommended holding periods in the product prospectuses.
After the 2014 settlement, firms created an automated alert to flag all non-traditional ETP positions held for more than 30 days. However, Stifel “almost immediately” disabled the alert after receiving more than 2,000 clicks per day. Although some of the hits were not inappropriate, according to FINRA, it reported many potentially inappropriate recommendations on customer accounts.
The 30-day alert was inactive for about eight months. In March 2015, Stifel tried to use it again, with hundreds of hits each day, but even then, supervisors had “broad discretion” in resolving alerts and received no training on how to analyze the results. Supervisors often purged 30-day alerts when analyzing any of them, often entering comments such as “same,” “no change,” or “see above” to purge alerts from the system.
Within a few years, Stifel realized that representatives were “routinely” recommending long-term holdings of non-traditional ETPs. As a result, the firm began a “clean-up” effort, which included tracking positions held for more than 30 days and encouraging (but not requiring) supervisors to check with representatives and clients about selling them.
Despite this action, some representatives continued to recommend strategies that held non-traditional ETPs for longer periods, including an 87-year-old client with a conservative risk tolerance who held a daily reset non-traditional ETP for 454 days ( losing about $5,000 ) and a 77-year-old client who lost about $13,000 after holding a similar ETP for over a year.
Representatives from Stifel did not respond to a request for comment before publication.
During this period, representatives recommended at least 438 non-traditional ETPs with daily resets held for more than a week and 45 products with monthly resets held for more than 60 days. In total, 381 accounts lost nearly $1.3 million, according to FINRA. Stifel stopped soliciting sales of these types of products in March 2018.
Stifel agreed to pay a $920,000 fine and $1,189,841.54 in restitution. SIA agreed to a fine of $80,000 and restitution of $100,095.63.
This is the second week in a row that FINRA has settled charges and fined Stifel Financial. In a deal disclosed last week, the regulator alleged that Stifel failed to catch an unnamed registered representative who stole more than $100,000 from an elderly customer by obtaining authorization for them. FINRA fined Stifel $400,000 to settle the charges.