SEC Charges Five Firms for Unsuitable Exchange-Traded Product Sales

The companies’ advisers told clients to hold complex short-term investments for as long as a year or more, contrary to warnings in offering documents.

The US Securities and Exchange Commission (SEC) has settled actions against three investment advisory firms and two broker/dealer (B/D) advisory firms for violations related to unsuitable sales of complex volatility-linked exchange-traded products (ETPs).

The actions, which the regulator said will lead to the return of more than $3 million to harmed investors, were filed 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.

According to the complaints against the companies, the actions concern the sales of exchange-traded products that attempted to track short-term volatility in the market. The SEC said the offering documents for the products explicitly warned that the products were intended for a very short investment horizon, and were likely to experience a decline in value if held over a longer period. Nevertheless, the firms’ representatives recommended their clients buy and hold the products for months and even years in some instances, according to the orders.

“It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives,” Stephanie Avakian, director of the SEC’s Division of Enforcement, said in statement. “Failing to do so puts investors at risk.”

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The SEC’s orders against each of the firms said they failed to implement written policies and procedures to prevent violations of the Investment Advisers Act. For example, the order against American Portfolios Advisors said the firm failed to supervise certain brokerage representatives who recommended their customers buy and hold volatility-linked products.

“APA failed to adopt and implement policies and procedures reasonably designed to prevent unsuitable recommendations of complex ETPs,” said the complaint against the firm. “APA did not have policies and procedures that would allow it to determine whether its investment adviser representatives were fulfilling their fiduciary obligation to provide only suitable investment advice.”

The complaint said American Portfolios’ compliance manual did not contain policies and procedures specific to complex products, and it didn’t provide for any review procedures concerning such recommendations or training regarding such products, despite being aware that its representatives were recommending the products to their retail clients.

The order against Benjamin Edwards said that although the offering documents for complex ETPs disclosed that they carried a higher risk of significant losses if held for extended periods, the firm’s advisers recommended that their clients hold them for several months at a time as a hedge.

“Benjamin Edwards’s brokerage and advisory representatives misunderstood the complex ETPs, or ignored these disclosures, and made unsuitable recommendations,” according to the complaint. “A number of these brokerage and advisory representatives also misled their customers and clients about the complex ETPs’ benefits and risks.”

And, according to the complaint against Summit Financial, at least 92 of the firm’s advisory client accounts held a security called the iPath S&P 500 VIX Short–Term Futures ETN for several months and, in certain instances, more than a year. As a result, all but one of them experienced “meaningful losses.”

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 agreed to pay a civil penalty of $600,000 each; and Royal Alliance agreed to pay a civil penalty of $500,000.

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Tags: American Portfolios Financial Services/American Portfolios Advisors, Benjamin F. Edwards & Company, CBOE volatility index, exchange-traded products, Royal Alliance Associates, SEC, Securities America Advisors, Stephanie Avakian, Summit Financial Group

The gender pension gap in the UK has closed to just 1%, the narrowest it has ever been, according to a report from Scottish Widows. However, that 1% still translates to a significant pay gap as women are saving £1,300 ($1,722) a year less than men.

This means women would need to work an extra 37 years to save the same amount into their pensions as men do, which would mean they would have to work until they were well over the age of 100.

“While we’re heartened at the record levels of saving, there’s still a mountain to climb before we reach true gender pension parity,” Jackie Leiper, Scottish Widow’s managing director, workplace savings, said in a statement. “Women face decades of extra working before they’ll have a pension to match that of a man’s, which is unfair and unacceptable.”

To make matters worse, women are more likely to be adversely affected by COVID-19, as they tend to work in sectors that have been hit hardest by the pandemic, such as the hospitality and service sectors. And women are also more likely to bear the burden of the effects of extra child care needed during the crisis and the potential collateral consequences for their careers.

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The report also found that young women are not doing enough to save for their retirement as only 46% of women in their 20s are saving the recommended minimum 12% of their salary. This compares with 56% of men of the same age saving at least 12%, and 64% of women in their 50s, which shows that women tend to save more as they get older. However, the report warned, failing to save more while they’re young means women miss out on the benefits of compound interest, which can help their savings grow significantly during the course of their working lives.

Although automatic enrollment has been a huge driver in getting more women to save for their retirement, the report found that there are still several challenges preventing a level playing field, such as women still being paid less than men. The report found that the average annual difference in median wage between men and women in full-time jobs is £6,100, which rises to £10,800 for all employment types.

And, as more women are responsible for child care, the number of hours they are able to work is reduced, which limits their earning capacity. According to the report, 75% of all part‐time workers in the UK are women, and the majority of UK families with a child under 4 consist of a father working full‐time and a mother working part‐time.

“We’re calling for urgent pension reforms that will help more women save more for retirement,” Leiper said, “including improved child care provisions, enhanced pensions for those on maternity leave, the inclusion of pensions in divorce proceedings, and the scrapping of the auto‐enrollment minimum earnings threshold.”

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Tags: Coronavirus, COVID-19, Gender Gap, Jackie Leiper, Pandemic, Pension Reform, Scottish Widows, UK