According to FINRA, Smith, Brown & Groover, Inc. and its principal Raymond Hill Smith Jr. were sanctioned for recommending a trading strategy to customers without understanding its risks, resulting in near-total losses for investors.

The firm was censured and ordered to pay $2,000,000 in partial restitution to customers. Smith was fined $15,000 and suspended for a total of ten months (six months in all capacities followed by four months in principal capacity).

The violations stemmed from Smith developing and implementing a trading strategy that primarily invested in a high-risk, complex exchange-traded note (ETN). Despite being the strategy's developer, Smith did not fully understand the ETN's basic features, including how it maintained inverse exposure to volatility or that it was designed for daily trading only.

The firm and Smith invested customers in this ETN for extended periods (averaging 72 days) contrary to the product's disclosure documents. They also conducted flawed testing that over-estimated potential returns. When market volatility surged, customer accounts fully invested in the strategy suffered near-total losses as the ETN's value collapsed and the issuer called the product.

The firm had no procedures for conducting reasonable-basis suitability analysis for complex products and no documented concentration limits. Though there was an informal 10% concentration guideline, some customers exceeded it significantly.

This case underscores the importance of understanding complex products before recommending them. Investors should be wary of strategies involving leveraged or inverse ETNs, which are designed for short-term trading and can produce devastating losses when held longer.