The Securities and Exchange Commission (SEC) ordered three investment advisory firms and two broker-dealers (also registered as advisory firms) to return a total of more than $3 million to harmed investors who were offered with volatility-linked exchange-traded products.
According to the SEC, charges were filed against American Portfolios Financial Services (APFS), Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. The firms agreed to settle the allegations lodged against them.
The SEC alleged that these investment advisory firms, broker-dealers violated the Securities and Exchange Act and the Investment Advisers Act in connection with the sales of volatility-linked exchange-traded products.
In its orders against the firms, the Commission noted that the value of the products tried to track short-term volatility expectations in the market, which is normally measured against derivatives of the CBOE volatility index.
The firms’ offering documents indicated that these investment products are more likely to decline in value when held for a longer period.
The SEC found that the firms’ representatives recommended the volatility-linked exchange-traded products to investors and advised them to hold it for months or years.
Additionally, the firms allegedly failed to adopt or implement policies and procedures concerning the suitability and volatility-linked exchange-traded products.
In a statement, SEC Division of Enforcement Director Stephanie Avakian said, “It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so, puts investors at risk. We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments.”
SEC allegations and order against American Portfolios Financial Services (APFS)
The Commission accused APFS of failing to adequately supervise some of its brokerage representatives who offered investors to buy and hold volatility-linked exchange-traded products
The SEC ordered the firm to pay a total of $653,072 civil monetary penalty, disgorgement, and prejudgment interest.
SEC allegations and order against Benjamin Edwards & Company
The SEC alleged that some of the firm’s brokerage representatives have a flawed understanding of complex exchange-traded products, which they recommended to their clients based on their belief that the equity stock markets were overvalued and might decline in the future.
They allegedly ignored or did not fully understand the information on the firm’s prospectus for complex exchange-traded products including the warning against holding it as a long-term investment.
Under the SEC order, Benjamin Edwards & Company is required to pay disgorgement, prejudgment interest, and a civil monetary penalty totaling $685,134.36.
SEC allegations and order against Summit Financial Group
Summit Financial Group failed to fully implement its own policy banning volatility-linked exchange-traded products from client accounts. The firm also failed to take sufficient actions to determine whether clients continued to maintain such investment products, the SEC alleged.
The Commission ordered the firm to pay disgorgement, prejudgment interest, and a civil monetary penalty totaling $603,799.08.
SEC allegations and order against Securities America Advisors
The SEC alleged that Securities America Advisors’ policies and procedures concerning the suitability of volatility-linked exchange-traded products were inadequate to prevent violations of the Advisers Act. It also failed to implement its existing policies and procedures, which prohibits long-term investments in such products.
The Commission ordered the firm to pay disgorgement, prejudgment interest, and a civil monetary penalty totaling $603,776.82.
SEC allegations and order against Royal Alliance Associates
The SEC alleged that Royal Alliance Associates failed to implement its written supervisory policy and sales practice manual requiring its representatives to ensure that their actions are “consistent with the fiduciary duty owed to their clients.”
The firm’s representatives failed to make suitable recommendations to clients about volatility-linked exchange-traded products. They also failed to conduct reasonable investigations and due diligence into such products recommended to clients, according to the Commission.
Under the SEC order, Royal Alliance Associates is required to pay disgorgement, prejudgment interest, and a civil money penalty totaling $502,400.29.
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