Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) sanctioned brokerage firm The Oak Ridge Financial Services Group, lnc. (Oak Ridge) in connection with allegations that Oak Ridge failed to establish and maintain a supervisory system regarding the sale of leveraged, inverse and inverse leveraged exchange-traded funds (Non-Traditional ETFs) that were reasonably designed to achieve compliance with the securities laws.
Oak Ridge became a FINRA member in 1997 and is headquartered in Golden Valley, Minnesota. Oak Ridge engages in a general securities business, employs 57 registered representatives, and operates out of a single office.
Non-Traditional ETFs contain drastically different characteristics, including risks, from traditional ETFs that simply seek to mirror an index or benchmark. Non-Traditional ETFs use a combination of derivatives instruments and debt to multiply returns on underlining assets. The leverage employed by Non-Traditional ETFs is designed not simply to mirror the index but to generate 2 to 3 times the return of the underlining asset class. Non-Traditional ETFs can also be used to return the inverse or the opposite result of the return of the benchmark.
While regular ETFs can be held for long term trading, Non-Traditional ETFs are generally designed to be used only for short term trading because of the use of leverage and its effects upon the funds’ returns. If Non-Traditional ETFs are held for longer periods, the results can vary drastically from the underlining index. For example, between December 1, 2008 and April 30, 2009, the Dow Jones U.S. Oil & Gas Index gained two percent while the ProShares Ultra Oil and Gas, a fund seeking to deliver twice the index’s daily return fell six percent. Another ETF Fund, the ProShares UltraShort Oil and Gas, seeking to deliver twice the inverse of the index’s daily return fell by 26 percent over the same period.
Consequently, The Securities Exchange Commission (SEC) has warned that most Non-Traditional ETFs reset daily and FINRA has stated that Non-Traditional ETFs are typically not suitable for most retail investors. Because of the substantial risks involved in investing in Non-Traditional ETFs, the short holding period, and the very limited use of such funds for most retail trading investment strategies, many brokerage firms have simply prohibited the solicitation of these investments to its customers due to suitability concerns.
FINRA found that from June 1, 2010, through November 30, 2012, Oak Ridge did not conduct any formal due diligence of Non-Traditional ETFs before allowing its representatives to recommend them to firm customers. FINRA found that Oak Ridge also did not provide any formal training for its brokers on Non-Traditional ETFs. In addition, FINRA alleged that Oak Ridge could not properly supervise the sales of these products because the firm did not use or make available to its supervisory personnel any reports or other tools to monitor the length of time that customers held open positions or losses occurring on those positions.
The attorneys at Gana Weinstein LLP can help you or someone you know who has suffered investment losses related to Non-Traditional ETFs evaluate their potential securities case. If you suspect misconduct in your account please contact us for a free consultation.