According to FINRA, Matthew Jason Childs of Palm Springs, California, was suspended from association with any FINRA member in all capacities for two months for recommending that retail customers purchase non-traditional exchange-traded products (NT-ETPs) without having a sufficient understanding of the risks and features associated with those products. The suspension was in effect from September 3, 2024, through November 2, 2024. In light of Childs' financial status, no monetary sanction was imposed.
The findings revealed that Childs recommended NT-ETPs to retail customers without having a reasonable basis to make those recommendations. NT-ETPs, which include leveraged and inverse exchange-traded funds, are complex instruments that use derivatives and other strategies to amplify returns or deliver the inverse of an index's performance on a daily basis. Because these products reset daily, their returns over longer periods can deviate significantly from the performance of the underlying benchmark due to compounding effects. This characteristic makes them generally unsuitable for long-term holding.
Despite these well-known risks, Childs recommended that his customers purchase daily reset NT-ETP positions and hold them for periods ranging from eight to 1,034 days. Holding leveraged or inverse ETPs for nearly three years, as occurred in the most extreme case here, can result in substantial losses even if the underlying index performs in the direction the investor anticipated. The customers who followed Childs' recommendations incurred $31,667.02 in total net realized losses.
FINRA rules require that brokers have a reasonable basis for their recommendations, which means they must understand the products they recommend and have a reasonable belief that the recommendations are suitable for their customers. This obligation is particularly important with complex products like NT-ETPs, where the risks may not be immediately apparent to retail investors.
For investors, this case is a stark reminder to ask questions before acting on any investment recommendation. Investors should ask their broker to explain how a product works, what risks are involved, and what the intended holding period is. If a broker cannot clearly explain these elements, that is a warning sign. Investors should also be aware that leveraged and inverse ETPs are generally not suitable for long-term investment strategies and should be skeptical of any recommendation to hold such products for extended periods. FINRA BrokerCheck allows investors to review the disciplinary history of any registered broker before entrusting them with their money.
