Advisor Group, Cetera and Other BDs to Pay $3M Over Sales of Risky ETPs

The sales occurred between January 2016 and April 2020, the SEC said, noting the actions were the first arising from investigations generated by its Division of Enforcement's Exchange-Traded Products Initiative, that used trading data analytics to uncover potential unsuitable sales.

The five actions involved sales of volatility-linked exchange-traded products, the SEC noted. As set forth in the orders, the value of the products attempted to track short-term volatility expectations in the market that are 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 the products sold made investments in the products more likely to experience a decline in value when held over a longer period, the SEC alleged.

The orders found that, contrary to the warnings, and without understanding the products, representatives of the five firms recommended their clients buy and hold the products for longer periods, including in some circumstances, for months and years, according to the SEC.

The orders also found that the firms failed to adopt or implement policies and procedures regarding suitability and volatility-linked exchange-traded products, the SEC alleged.

"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," according to 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," she said in a statement.

The orders against each of the firms found 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 additionally found that firm failed to reasonably supervise certain brokerage representatives who recommended their customers buy and hold a volatility-linked product.

The order against Benjamin Edwards, meanwhile, additionally found that firm failed to reasonably supervise certain brokerage and advisory representatives who recommended their clients buy and hold two volatility-linked products.