According to FINRA, Insight Securities, Inc. was censured and fined $25,000 for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with its suitability obligations in connection with inverse and leveraged exchange traded funds or notes (non-traditional exchange traded products or NT-ETPs).
Although the firm was aware of the complex nature of NT-ETPs, it permitted representatives to offer the products to retail customers on a solicited basis without having a supervisory system to reasonably monitor those transactions. Between March 2017 and June 2020, firm registered representatives solicited purchases of NT-ETPs totaling $23.9 million and sales totaling $24.5 million in retail customer brokerage accounts.
The firm did not monitor the holding periods of its customers' positions in NT-ETPs, nor did its written supervisory procedures require supervisors to conduct such monitoring. Instead, the firm relied on supervisors to conduct a manual blotter review to detect potentially unsuitable NT-ETP transactions. However, the blotter review did not provide supervisors with information on how long customers held the products.
Notably, the firm failed to reasonably monitor NT-ETP holding periods despite having twice been warned by FINRA that its supervisory systems were deficient in failing to conduct such monitoring. In response to the first warning, the firm represented to FINRA that it would immediately cease soliciting trades in NT-ETPs, yet continued to solicit the products.
Non-traditional ETPs are complex products designed for short-term trading, typically one day or less. When held for longer periods, these products can perform very differently than expected due to compounding effects. This case illustrates the critical importance of monitoring holding periods for complex products and implementing supervisory systems that can identify when customers are holding products inappropriate for their needs. The firm's continued solicitation of NT-ETPs despite promising FINRA to stop is particularly concerning.
