Almost a decade after paying $1 million in penalties for similar violations, Stifel Financial Corp. broker-dealers agreed yesterday to fines and restitution of almost $3 million as a result of shortcomings in supervision and compliance related to financial advisors' sales of non-traditional exchange-traded funds and products.
According to the order issued Monday by the Financial Industry Regulatory Authority Inc., two Stifel broker-dealers – Stifel Nicolaus & Co. Inc., the employee firm, and Stifel Independent Advisors, for independent contractor reps and advisors – were penalized in 2014, agreed to make changes in their sales of the products but didn't meet their obligations.
Just months after the initial Finra penalty in January 2014, the Stifel firms fell short of their goals, according to Finra.
They "again failed to establish, maintain, and enforce supervisory systems, including written supervisory procedures, reasonably designed to achieve compliance with their suitability obligations in connection with transactions involving NT-ETFs and other non-traditional exchange-traded products," according to Finra.
Non-traditional exchange-traded products "are complex products that are designed to be held for only short periods of time, typically a single day or a single month," according to Finra. "Stifel failed to take reasonable steps to detect and address hundreds of potentially unsuitable recommendations that customers buy and hold [non-traditional exchange-traded products] for longer periods of time than they were designed to be held, resulting in realized losses for customers."
Based in St. Louis, Stifel has close to 5,000 registered reps and 450 branch offices, according to Finra. Stifel agreed to the settlement without admitting or denying Finra's findings in the matter, and a company spokesperson declined to comment.
As a result of supervisory failures from 2014 to 2018, "the Stifel firms failed to detect or address
hundreds of occasions during the relevant period in which the firms' representatives recommended that customers buy and then hold [non-traditional exchange-traded products] for potentially unsuitable periods," according to Finra. "Some of the affected customers were seniors, and many had conservative investment objectives or moderate risk tolerances."
Finra's guidance for brokerage firms typically is to reassess their sales of such products. Because of the effect of compounding, the products are usually not suitable for retail investors who have them in their accounts beyond the stated trading period.
"Stifel had a detections system in place to detect if these kinds of products were being held over time," said Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services. "But because it got so many hits, the firms shut it down, leaving over 2,000 instances of supervisory review in question. It looks like Stifel's documentation was either very weak or not available."
The Stifel firms were censured, fined $920,000 and agreed to pay client restitution of almost $2 million, according to Finra.
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