On October 24, 2012 Morgan Keegan & Company, Inc. (“Morgan Keegan”) entered into a Letter of Acceptance, Waiver and Consent (“AWC”) with FINRA concerning its supervision of of sales of “Non-Traditional ETFs” which were “not sufficiently tailored to address the unique features and risks involved with these products.” FINRA rules require a “broker to perform reasonable diligence to understand the nature of a recommended security, as well as the potential risks and rewards.”
In the AWC, FINRA contented, among other things, that
During the period from January 2008 through June 2009 (the “Relevant Period”), Morgan Keegan failed to establish and maintain a supervisory system, including written procedures, reasonably designed to achieve compliance with applicable NASD and/or FINRA rules in connection with the sale of leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“Non-Traditional ETFs“). Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Some Non-Traditional ETFs are “inverse” or “short” funds, meaning that they seek to deliver the opposite of” the performance of the index or benchmark they track. Some funds are both inverse and leveraged, meaning that they seek to achieve a return that is a multiple of the inverse performance of the underlying index or benchmark.
Non-Traditional ETFs have certain risks that are not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. The performance of Non-Traditional ETFs over longer periods of time can differ significantly from the performance of their underlying index or benchmark, especially in volatile markets. Nonetheless, Morgan Keegan supervised Non-Traditional ETFs the same way it supervised traditional ETFs. Thus, Morgan Keegan failed to establish a reasonable supervisory system and written procedures to monitor the sale of Non-Traditional ETFs. Morgan Keegan also failed to establish adequate formal training regarding Non-Traditional ETFs during the Relevant Period.
See FINRA Letter of Acceptance, Waiver and Consent, No. 20090191135 (10/24/2012) (emphasis added).