Risk & Compliance

Oppenheimer Fined $3M Over ETF Sales

FINRA says the money manager sold non-traditional exchange-traded funds to investors who weren't qualified to buy them.
Matthew HellerJune 8, 2016

Oppenheimer & Co. has agreed to pay $3 million to settle charges alleging improper sales of about $1.7 billion in non-traditional exchange-traded funds to retail investors.

The Financial Industry Regulatory Authority on Wednesday said the money manager executed more than 30,000 transactions between August 2009 and September 2013 that violated policies it had adopted after FINRA warned of the risks of certain non-traditional ETFs.

Oppenheimer failed to reasonably enforce those policies, FINRA said, by allowing its brokers to continue to solicit retail customers to purchase leveraged and inverse ETFs and to execute unsolicited transactions even though the customers did not meet its eligibility criteria.

“Written procedures are worthless unless accompanied by a program to enforce them,” Brad Bennett, FINRA’s chief of enforcement, said in a news release. “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.”

Oppenheimer will pay a $2.25 million fine and $716,831 in restitution to affected clients. In 2012, a number of other banks settled similar charges, paying more than $9.1 million.

Exchange-traded funds offer leverage or are designed to perform inversely to the index or benchmark they track — or both. “The leveraged versions use futures or derivatives to multiply the daily returns of an index, sometimes striving to double or triple the return,” the Wall Street Journal explained. “Inverse ETFs seek to return the opposite of the index.”

FINRA also faulted Oppenheimer for failing to effectively monitor the holding periods for non-traditional ETFs and failing to perform adequate due diligence into their risks. When those funds are held for longer than a day, the WSJ noted, “compounding can lead to returns that vary significantly from the underlying assets, making them unpredictable and risky to hold for longer periods.”

According to FINRA, the unsuitable Oppenheimer investors included an 89-year-old with an annual income of $50,000 who held 96 solicited non-traditional ETFs for an average of 32 days and lost $51,847.