SEC Charges Investment Advisory Firms and Broker-Dealers in Connection with Sales of Complex Exchange-Traded Products

The Securities and Exchange Commission today filed settled actions against three investment advisory firms and two dually-registered broker-dealer and advisory firms for violations that related to unsuitable sales of complex exchange-traded products to retail investors. The sales occurred between January 2016 and April 2020. These actions are the first arising from investigations generated by the Division of Enforcement's Exchange-Traded Products Initiative, which utilized trading data analytics to uncover potential unsuitable sales.

The five actions filed today – against American Portfolios Financial Services/American Portfolios Advisors Inc., Benjamin F. Edwards & Company Inc., Royal Alliance Associates Inc., Securities America Advisors Inc., and Summit Financial Group Inc. – will result in the return of over $3 million to harmed investors.

The five actions concern sales of volatility-linked exchange-traded products. As set forth in the orders, the value of the products attempted to track short-term volatility expectations in the market, typically measured against derivatives of the CBOE volatility index. According to the orders, the offering documents for the products made clear that the short-term nature of these products made investments in the products more likely to experience a decline in value when held over a longer period. The orders find that, contrary to these warnings, and without understanding the products, representatives of the firms recommended their customers and clients buy and hold the products for longer periods, including in some circumstances, for months and years. The orders further find that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products.

"It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives. Failing to do so puts investors at risk," said Stephanie Avakian, Director of the SEC's Division of Enforcement. "We take these failures seriously, and we will continue to look for sales that expose customers to unsuitable investments."  

“These cases demonstrate the importance of data analytics in our efforts to surveil the market and pinpoint unsuitable sales of complex financial products,” said Daniel Michael, Chief of the Enforcement Division’s Complex Financial Instruments Unit.  “We will continue to use these tools to protect retail investors.”

The orders against each of the firms find that they failed to implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and its rules. 

The order against American Portfolios further finds that the firm failed reasonably to supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product. The order against Benjamin Edwards further finds that the firm failed reasonably to supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products.

Without admitting or denying the findings, each firm agreed to cease and desist from future violations of the charged provisions, a censure, and to pay disgorgement and prejudgment interest. American Portfolios and Benjamin Edwards each agreed to pay a civil penalty of $650,000, Securities America and Summit each agreed to pay a civil penalty of $600,000 and Royal Alliance agreed to pay a civil penalty of $500,000.

The Exchange-Traded Products Initiative is led by the Division of Enforcement's Complex Financial Instruments Unit. It was developed by Armita Cohen and data analytics specialists Daniel Koster and Jonathan Vogan and has been coordinated by Ms. Cohen. The investigations for these five matters were conducted by Nicholas A. Brady, Matthew B. Homberger, Kristopher Heston, Elisabeth Goot, Brendan McGlynn, Osman Nawaz, Kelly Rock, Margaret Y. Rubin, Trevor Schumacher, Jeffrey Shank, Thomas Silverstein, Andrew Sporkin, Danielle R. Srour, and Jeffrey Weiss. The Division of Economic and Risk Analysis and the Enforcement Division’s Center for Risk and Quantitative Analytics provided valuable assistance as part of the initiative.