Broker Dealer Financial Services Corp. Fined By FINRA Over Nontraditional ETF Sales and Improper Supervision

Broker Dealer Financial Services Corp. (BDFS) based out of West Des Moines, Iowa just learned the hard way that nontraditional Exchange Traded Funds (ETFs) are risky, speculative investments and are not appropriate for all investors.

The Financial Industry Regulatory Authority (FINRA) recently fined BDFS $75,000 for 1. failing to properly supervise the sale of leveraged ETFs to its customers, 2. not properly training its sales force about the appropriate use of leveraged ETFs in customer accounts, and 3. not adequately supervising nontraditional ETF activity in customer accounts.

According the Letter of Acceptance, Waiver, and Consent, from March of 2009 to April of 2012, BDFS “recommended nontraditional ETFs to more than 200 customers” without “a reasonable basis for believing that the nontraditional ETF transactions it recommended were suitable for any investor.”  BDFS’s ETF related misconduct was said to have violated NASD Rules 2310 and 3010 along with FINRA Rules 2010 and 2111.

Traditional ETFs are similar to mutual funds in that they are typically designed to offer returns by tracking an index like the S&P 500 or Dow Jones.  Unlike mutual funds, ETFs trade on an exchange like stocks and typically have lower fees and higher liquidity.

Nontraditional or Leveraged ETFs are complex products and differ from traditional ETFs in that they endeavor to return multiples of a given index’s return – typically double or triple the return – or the inverse of a given index’s return, or both.  For example, a double leveraged “bear” S&P 500 ETF would be designed to return twice the opposite of the S&P 500’s performance.  So if the S&P 500 went down 1, the ETF would (in theory) go up 2, and vice versa.

Because nontraditional ETFs use derivatives such as swaps and futures contracts to achieve their desired performance, they can be especially risky.  The features of nontraditional ETFs more often than not make them useful only to speculative day-traders and completely unsuitable as “buy and hold” investments for average “mom and pop” investors.

Given that nontraditional ETFs can be so dangerous for the average investor, proper supervision by the selling broker-dealer, like BDFS, is critical to ensure that “mom and pop” are not the ones buying them as long term investments in their accounts.  When firms fail at conducting the proper due diligence and supervision, their customers can suffer crushing losses in their accounts as a result.

Examples of nontraditional ETFs that are usually not appropriate for average investors yet improperly sold to them anyway are:

Direxion Daily Nat Gas Rltd Bull 3X                            GASL

Direxion Daily Jr Gld Mnrs Bull 3X                             JNUG

Direxion Daily Brazil Bull 3X                                         BRZU

Direxion Daily Gold Miners Bull 3X                             NUGT

Direxion Daily Russia Bull 3X                                        RUSL

Direxion Daily Latin America Bull 3X                          LBJ

ProShares Ultra MSCI Brazil Capped                          UBR

Direxion Daily Energy Bull 3X                                      ERX

ProShares Ultra Oil & Gas                                              DIG

ProShares Ultra MSCI Mexico Capped IMI               UMX

Direxion Daily FTSE Europe Bull 3X                          EURL

Direxion Daily South Korea Bull 3X                            KORU

ProShares Ultra FTSE Europe                                      UPV

Direxion Daily Dev Mkts Bull 3X                                  DZK

Direxion Daily Emrg Mkts Bull 3X                               EDC

ProShares Ultra MSCI EAFE                                         EFO

ProShares Ultra MSCI Emerging Markets                 EET

If you or a family member invested in nontraditional ETFs such as those listed above or others, contact the securities fraud lawyers at Malecki Law for a free consultation and case evaluation at (212) 943-1233.

It is the right of any and all investors who believe they may have suffered losses as a result of recommendations of their financial advisor to contact our offices to explore their legal rights and options.  The attorneys at Malecki Law have extensive experience representing investors.