The Arkansas Securities Department sanctioned both Morgan Keegan & Co. of Memphis and Stephens Inc. of Little Rock for allowing employees to sell highly volatile investments to customers for whom the investments were inappropriate.
These investments are called inverse exchange-traded funds and leveraged exchange-traded funds. Unlike regular exchange-traded funds — which are similar to mutual funds and are traded like stocks — these nontraditional ETFs are far more complicated.
“Non-traditional ETFs have certain risks that are not found in traditional ETFs, such as the risks associated with daily reset, leverage, and compounding, and are therefore generally appropriate for relatively aggressive investors,” the ASD wrote in its October 2012 consent order with Morgan Keegan.
“Most non-traditional ETFs ‘reset’ daily, meaning they are designed to achieve their desired objective on a daily basis, and the effects of compounding present unique risks over longer holding periods,” according to the ASD.
Morgan Keegan was fined $15,000 and forced to pay almost $45,000 in restitution because one of its financial advisers, Keith H. Freeman, sold nontraditional ETFs to an Arkansas couple nearing retirement age who were specifically seeking less aggressive investments.
Stephens Inc. was fined $25,000 in August because it allowed its registered agents to sell nontraditional ETFs in 2008-09 with no written guidance as to when such investments would be appropriate or inappropriate.
