Oppenheimer Fined 2.25 million for ETF Suitability & Due Diligence Failures

The Financial Industry Regulatory Authority (FINRA) announced that it has fined Oppenheimer & Co. Inc. $2.25 million and ordered the firm to pay restitution of more than $716,000 to affected customers for selling leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) to retail customers without reasonable supervision and due diligence, and for recommending non-traditional ETFs that were not suitable.

In August 2009, in response to FINRA Regulatory Notice 09-31, which advised broker-dealers of the risks and inherent complexities of certain non-traditional ETFs, Oppenheimer instituted policies prohibiting its representatives from soliciting retail customers to purchase non-traditional ETFs, and also prohibited them from executing unsolicited non-traditional ETF purchases for retail customers unless the customers met certain suitability criteria, e.g., the customer had liquid assets in excess of $500,000. Oppenheimer, however, failed to reasonably enforce these policies; thus, representatives continued to solicit retail customers to purchase non-traditional ETFs and continued to execute unsolicited non-traditional ETF transactions even though the customers did not meet Oppenheimer’s stated criteria. From August 2009 through September 30, 2013, more than 760 Oppenheimer representatives executed more than 30,000 non-traditional ETF transactions totaling approximately $1.7 billion for customers.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, “Written procedures are worthless unless accompanied by a program to enforce them. While Oppenheimer’s procedures prohibited solicitation of non-traditional ETFs, the absence of any meaningful compliance effort resulted in its representatives continuing to solicit unsuitable non-traditional ETF purchases, including a number involving elderly investors.”

FINRA also found that Oppenheimer failed to conduct adequate due diligence regarding the risks and features of non-traditional ETFs; and, as a result, did not have a reasonable basis to recommend these ETFs to retail customers, which made the trades unsuitable. Similarly, Oppenheimer representatives solicited and effected non-traditional ETF purchases that were not suitable for specific customers. For example:

  • An 89-year conservative customer with annual income of $50,000 held 96 solicited non-traditional ETF positions for an average of 32 days (and for up to 470 days), resulting in a net loss of $51,847.
  • A 91-year conservative customer with an annual income of $30,000 held 56 solicited non-traditional ETF positions for an average of 48 days (and for up to 706 days), resulting in a net loss of $11,161.
  • A 67-year conservative customer with an annual income of $40,000 held two solicited non-traditional ETF positions in her account for 729 days, resulting in a net loss of $2,746.

In concluding this settlement, Oppenheimer & Co. Inc. neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.