A general securities representative settled FINRA charges for advising customers to purchase Leveraged and Inverse Exchange Traded Funds ("LIETFs") without understanding the associated risks and features. The firm with which he was associated was charged with the failure to supervise.
According to the Letter of Acceptance, Waiver and Consent, the general securities representative lacked a "reasonable basis" under FINRA Rule 211 ("Suitability") for recommending LIETFs to customers. According to FINRA, Darren Michael Kubiak (i) intended for customers to hold the shares for multiple weeks, contrary to published guidance that recommends a very short holding period, and (ii) did not understand that LIETFs are generally expected to lose value over time, and that such losses are compounded due to daily valuation resets.
FINRA also determined that broker-dealer Kalos Capital, Inc. ("Kalos") failed to (i) establish, maintain and enforce sufficient supervisory procedures regarding the sale of LIETFs and (ii) supervise Mr. Kubiak.
To settle the charges, Mr. Kubiak agreed to (i) pay $5,000 and (ii) a three-month suspension. Kalos agreed to a (i) censure, (ii) $30,000 fine, and (iii) restitution of $86,614 plus interest.
Commentary
This is an interesting case because the enforcement action implies that the sales representative didn't have any malicious intent - he just didn't understand what he was selling. It also should serve as a caution to firms, particularly firms that operate on an independent contractor model as was the case here, that they are at risk if they let associated persons sell complicated products without a formal training system in place. The risks of a less-rigorous control system will increase as Regulation Best Interest comes into effect.
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