On Monday, February 24, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) fined broker-dealer Berthel Fisher & Co. Financial Services Inc. (“Berthel Fisher”) and an affiliate, $775,000 for compliance and supervisory failures surrounding the inappropriate sale to its customers of alternative investments and nontraditional exchange-traded funds (ETFs), including non-traded real estate investment trusts (REITS), leveraged and inverse exchange-traded funds (ETFs), managed futures, oil-and-gas programs, equipment-leasing programs and business-development companies.
According to FINRA, for the time period of four years (from 2008 through 2012), Berthel Fisher, “had inadequate supervisory systems and written procedures for sales” of alternative investments. In a statement, Brad Bennett, FINRA’s executive vice president of FINRA’s Department of Enforcement, emphasized that, “a strong culture of compliance is an essential element of the proper marketing of complex products…Berthel’s supervision of the sales of nontraded REITs, inverse ETFs and other products fell short of this standard, as it failed to ensure that its registered representatives understood the unique features and risks of these products before presenting them to retail clients.” FINRA specifically found that Berthel Fisher’s brokers did not conduct proper reviews to determine if the products were suitable for its clients, and that Berthel Fisher failed to train its sales force regarding the characteristics of and risks associated with complex alternative investments. FINRA also determined that Berthel Fisher did not supervise one of its remote branch offices by failing to review e-mails and conduct required audits.
Through its investigation, FINRA learned that Berthel Fisher’s brokers recommended approximately $49 million in nontraditional ETFs, such as leveraged and inverse ETFs, to more than 1,000 clients. Generally, leveraged and inverse ETFs are risky, complex investment products designed to produce the inverse returns on a daily basis of whatever index they are tracking. These types of investment products have the potential for significant loss of principal and are not appropriate for all investors. For instance, non-traditional ETFs are focused on short-term, daily investment returns, and their performance over longer periods can be significantly affected by market volatility. According to FINRA, Berthel Fisher’s brokers sold these investment products to customers who were long-term investors and “who had stated a preference for a conservative approach to investments.” These investment products by their very nature are unsuitable for conservative investors with a long-term investment horizon, and generally speaking, should not be recommended to clients who cannot withstand significant loss of principal. Berthel Fisher is taking the position that FINRA’s investigation was “a result of a ‘sweep’ done by Finra throughout the industry” and that the firm settled the case “to eliminate any on-going legal expenses.” Be that as it may, Berthel Fisher has reportedly removed leveraged and inverse ETFs from its sales platform.
The fine imposed by FINRA against Berthel Fisher is just another push in FINRA’s campaign to sanction broker-dealers that allegedly fail to conduct due diligence into investment offerings/products and ensure proper training of employees/brokers who sell complex products. In this industry, training offered by broker dealers to its sales force is critical for investor protection. The training should make clear that an investment advisor/broker selling a complex investment product needs to understand how the investment product works and the risks associated with it in order to properly determine the suitability of the investment for a particular client and to provide a balanced discussion of the risks and rewards associated with the investment.
In addition to the $775,000 fine, Berthel Fisher was also ordered to pay $13,293 in restitution to investors and hire a consultant to improve its supervisory procedures. An affiliate of Berthel Fisher, Securities Management & Research Inc., was also fined by FINRA for not retaining certain required e-mails.
Lax & Neville LLP is investigating claims on behalf of investors regarding possible sales practice abuses in connection with Berthel Fisher’s sale and marketing of various alternative investments and nontraditional exchange-traded funds. Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers and investors who have suffered losses, including experience in prosecuting claims involving alternative investments and nontraditional exchange-traded funds. Please contact our team of attorneys for a consultation at (212) 696-1999.