SEC Charges Firms in Connection with Sales of Complex Exchange-Traded Products

The SEC filed settled actions against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations related to unsuitable sales of complex exchange-traded products to retail investors. The sales occurred between January 2016 and April 2020. These actions are the first arising from investigations generated by the Division of Enforcement's Exchange-Traded Products Initiative, which utilized trading data analytics to uncover potential unsuitable sales. The five actions– against American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. – will result in the return of over $3 million to harmed investors. The five actions concern sales of volatility-linked exchange-traded products.  The value of the products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the CBOE volatility index. According to the orders, the offering documents for the products made clear that the short-term nature of these products made investments in the products more likely to experience a decline in value when held over a longer period. The SEC’s orders found that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. The orders further found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products. Without admitting or denying the findings, each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. The SEC also issued a  public statement on these investment products saying that the enforcement actions “reflect examples of failures in design and/or implementation by firms of robust and effective policies and procedures, and highlight the importance of investment advisers and broker-dealers ensuring that the recommendations they make to their retail clients or customers comply with their legal obligations.”