Stifel Faces $2.2M in FINRA Penalties for Poor ETP Oversight

Stifel Financial will pay over $2.2 million to settle FINRA charges the firm failed to implement policies to catch registered reps’ unsuitable recommendations of non-traditional exchange-traded products. 

The fines follow a 2014 settlement knocking Stifel for the same lapses.

The settlement includes the St. Louis-based Stifel and Stifel Independent Advisors, formerly known as Century Securities Associates.

The charges involve non-traditional ETPs, which include leveraged and inverse ETPs tied to underlying indices or benchmarks. These vehicles are typically designed to be held for a short period of time, as the adverse effects of holding them for longer can outstrip the negative performance of whatever the underlying index is.

In January 2014, FINRA claimed Stifel failed to establish and maintain supervisory systems “reasonably designed” to comply with suitability obligations concerning non-traditional ETPs. The firms agreed to collectively pay more than $1 million in fines and restitution.

According to FINRA, Stifel attempted to correct its actions in the months following the 2014 settlement, including revising their written procedures and installing an automated alert to monitor holding periods for non-traditional ETPs. 

However, until Stifel fully implemented the changes in March 2018, the firms continued to fall short, according to FINRA’s allegations in the settlement announced this week.

The new written procedures acknowledged the products were complex, risky and “typically not suited for retail investors.” Still, the firms didn’t require supervisors to assess whether reps’ recommendations of the products were consistent with the recommended holding periods in the product prospectuses.

After the 2014 settlement, the firms created an automated alert to flag all non-traditional ETP positions held for over 30 days. However, Stifel “almost immediately” deactivated the alert after getting more than 2,000 daily hits. Though some of the hits weren’t unsuitable, it did flag many potentially unsuitable recommendations in customers’ accounts, according to FINRA. 

The 30-day alert was inactive for about eight months. In March 2015, Stifel tried using it again, with hundreds of hits each day, but even then, supervisors had “broad discretion” on resolving the alerts and didn’t get training on how to parse the results. Supervisors often cleared the 30-day alerts when analyzing any of them, frequently entering comments like “same,” “no changes,” or “see above”  to clear the alerts from the system.

Within a few years, Stifel realized that reps were “routinely” recommending long-term holds on non-traditional ETPs. As a result, the firm instituted a “clean-up” effort, which involved tracking positions held for longer than 30 days and encouraging (but not requiring) supervisors to check with reps and clients about selling them. 

Despite this action, some reps continued to recommend strategies that held non-traditional ETPs for more extended periods, including an 87-year-old client with a conservative risk tolerance who held a daily reset non-traditional ETP for 454 days (losing about $5,000) and a 77-year-old client who lost about $13,000 after holding a similar ETP for more than a year.

Representatives from Stifel did not respond to a request for comment prior to publication.

During this period, reps recommended at least 438 daily-reset non-traditional ETPs held for more than a week and 45 monthly-reset products held for more than 60 days. In total, 381 accounts lost nearly $1.3 million, according to FINRA. Stifel prohibited solicited sales of these kinds of products in March 2018. 

Stifel agreed to pay a $920,000 fine and restitution totaling $1,189,841.54. SIA agreed to a $80,000 penalty and restitution of $100,095.63.

This is the second week in a row that FINRA’s settled charges and fined Stifel Financial. In a settlement revealed last week, the regulator claimed Stifel failed to catch an unnamed registered rep who stole more than $100,000 from an elderly customer by receiving the power of attorney for them. FINRA fined Stifel $400,000 to settle the allegations.