FINRA censured Infinex Investments, Inc. and fined the firm $75,000 plus an order of $287,171.75 in restitution for multiple failures related to sales of inverse and inverse-leveraged exchange traded funds ("ETFs"). FINRA also reprimanded Infinex for related supervisory deficiencies.
FINRA Case #2011025436101
According to the findings, Infinex primarily sold two non-traditional ETFs during the relevant violative period from April 2009 through March 2011 that both were inverse-leveraged funds seeking single-day returns (they "reset" daily). One fund was inversely tied to the performance of the S&P 500 Index Fund while the other was inversely related to the 20+Year Treasury Fund's performance.
FINRA found that although both the S&P 500 and 20+Year Treasury Funds' prospectuses highlighted significant risks associated with each investment, including their short-term, leveraged and inverse nature that greatly increased risk, Infinex nonetheless made unsuitable recommendations involving these non-traditional ETFs.
Investigators found that Infinex failed to subject these non-traditional ETFs to the same level of diligence or review as other new products they offered for sale to retail customers, instead allowing brokers to recommend the non-traditional ETFs to clients without first performing reasonable due diligence to understand the relevant funds' associated features and risks.
The findings state that Infinex specifically permitted 35 representatives who received minimal training on non-traditional ETFs to recommend to 229 customers approximately 835 transactions pertaining to leveraged and inverse ETFs.
FINRA found these recommendations lacked a reasonable basis in violation of multiple FINRA/NASD conduct rules, including failure to ensure customer-specific suitability: several brokers recommended the risky non-traditional ETF purchases to customers whose investment objectives and risk tolerances were described as "conservative" or "low."
Several of the affected accounts were owned by elderly, retired customers and/or customers with IRA retirement accounts, including one 87-year-old customer with conservative objectives.
Digging deeper, the investigation revealed that the allegedly inadequately trained staff maintained purchases in customer accounts for longer than seven business days in 111 instances, even though the non-traditional ETFs reset daily. Instead, the average holding period was 302 days.
Investigators discovered that 70 of the affected customers with conservative investment objectives whose ETFs were held for seven days or longer lost money on their investments totaling $287,171.75, or the amount of restitution FINRA ordered from Infinex.
FINRA also charged Infinex with failure to establish and maintain a reasonable supervisory system and procedures related to non-traditional ETFs, including inadequate supervisory reviews for suitability and the failure to implement written supervisory procedures (WSPs).
FINRA also cited Infinex for inadequate training regarding the sale and supervision of non-traditional ETFs.
If you have invested with Infinex Investments, Inc. or with any broker or financial adviser whose unsuitable recommendations of inverse or leveraged ETFs—including non-traditional ETF recommendations with high levels of risk that clearly are at odds with conservative or low risk tolerances or objectives—has led to inappropriate holding periods or other improper financial activities that have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.