ETF Recommendations Under Scrutiny

(Originally published December 1, 2015) By Paul L. Vorndran

Regulators have been warning investors about investing in Exchange-Traded Funds (ETFs), a unit investment trust or open-end investment company whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.  In June 2009, those warnings were directed to broker-dealers and investment advisers.  The Financial Industry Regulatory Authority (FINRA), formerly the NASD, issued Regulatory Notice 09-31 in which it warned industry firms of their obligations to assess their customer’s suitability before recommending an ETF.  FINRA pointed out in the Notice that “inverse and leveraged ETFs typically are not suitable for retail investors who plan to hold them for more than one trading session. . . .”  In March 2013, the Staff of the Colorado Division of Securities brought a licensing action against a Colorado-licensed investment adviser, Wilson Advisory Group and Jeff M. Wilson, alleging violations of the Division’s rules prohibiting unsuitable recommendations and breach of fiduciary duty in connection with Wilson’s recommendation of ETFs in his retail customer accounts.  In the Notice of Charges and Consent Order, Wilson was ordered to pay $56,000 in restitution for the resultant investment losses was ordered not to solicit or obtain any new investment advisory clients.

Securities licensees should be very careful before recommending an ETF to a retail investor.

This communication is provided for your information only and is not intended to constitute legal advice or legal opinion as to any particular situation.  You should not take, or refrain from taking, any action based on information in this article, without seeking legal counsel from an attorney on your particular facts and circumstances. Jones & Keller would be happy to provide you with specific advice about particular situations, if desired.  Do not hesitate to contact us.

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