FINRA Says Rep’s ETF Trades Cost Customers $8.4M

This article was originally published by Law360.com

Former WFG Investments Advisor Jay Dee Jordan Barred from Securities Industry

Law360, New York (August 15, 2017, 8:05 PM EDT) — A former WFG Investments Inc. representative has agreed to be barred from the securities industry as a sanction for recommending trades in risky, nontraditional exchange-traded funds that caused $8.4 million in losses, according to a settlement filed Monday by the Financial Industry Regulatory Authority.

Jay Dee Jordan agreed to the bar without admitting or denying FINRA’s findings that he recommended unsuitable transactions of leveraged and inverse exchange-traded funds that resulted in customer losses of $8.4 million, failed to report customer complaints to WFG Investments, and failed to produce requested documents, among other violations.

The settlement comes days after FSC Securities Corp. agreed last week to pay a $100,000 fine and $492,485 in restitution to settle FINRA’s allegations it failed to supervise trades in similar ETFs.

Nontraditional ETFs use swaps, futures contracts and other derivatives to deliver a multiple of the index they track, in the case of leveraged funds, or the inverse of the index, in the case of inverse funds. There are also leveraged inverse ETFs that do both.

Most “reset” daily, and FINRA warned firms in a June 2009 regulatory notice that if held for longer periods, the funds can diverge widely from their benchmark, making them typically unsuitable for retail clients who plan to hold them for more than one trading session.

FINRA said in Monday’s settlement documents that Jordan recommended hundreds of unsuitable purchases of unsuitable nontraditional ETFs between June 1, 2012, around when his business partner left the firm and Jordan became responsible for making all investment recommendations to his customers, and March 31, 2016, just before he was terminated by WFG in April 2016.

Throughout that period, Jordan was convinced that an economic crisis or stock market collapse was imminent, and that concentrating his customers’ portfolios in nontraditional ETFs would allow them to benefit from rising oil prices, rising interest rates and declining equity values, FINRA said. Among other ETFs, he recommended investments in funds that delivered twice the inverse of the daily performance of the S&P 500, three times the performance of an S&P crude oil index, and three times the inverse of the daily performance of an index of Treasury bonds, according to the settlement.

WFG implemented a new procedure in February 2013 incorporating FINRA’s prior ETF guidance that required representatives to have an “adequate knowledge” of the products they recommended and to obtain signed risk disclosures from each customer trading in nontraditional ETFs, according to FINRA.

But Jordan was increasingly convinced that a collapse was near, and so escalated his recommendations that customers buy and hold nontraditional funds, FINRA said, while failing on numerous occasions to get a signed risk disclosure. Meanwhile, FINRA said that Jordan failed to understand the “extraordinary risks” associated with the products he was recommending, including that they reset daily.

In total, according to the settlement document, Jordan made trades in nontraditional ETFs in 84 of the 153 accounts he oversaw, recommending clients purchase more than $22 million of the risky products. He regularly failed to sell the funds the same day they were purchased, and on many occasions his customers held the ETFs for years, FINRA said.

FINRA said Jordan also improperly exercised discretion in some client accounts, making trades without authorization, and mislabelled trades he had solicited as “unsolicited.”

In one instance included in the settlement document, Jordan improperly exercised discretion in trust accounts owned by a married couple, both 76 years old, who had moderate risk tolerances, selling their holdings and investing almost exclusively in nontraditional ETFs. Jordan then maintained those positions for years, even as the funds sharply declined, FINRA said, and the couple ultimately submitted a letter to WFG alleging they sustained $3.8 million in losses on the trades.

FINRA also said that Jordan failed to tell WFG that two clients had complained about transactions in their accounts and attempted to settle one of those complaints on his own, without involving the firm.

Jordan also failed to respond to FINRA’s written requests for information about outside investments he may have made with one of his customers, the settlement document said, another violation of FINRA rules.

FINRA has brought numerous other cases over ETF investments, including several cases barring or fining representatives that made unsuitable recommendations of nontraditional ETFs, though few cases have reached the losses allegedly caused by Jordan’s trades. Among other actions, the self-regulatory organization fined Oppenheimer & Co. Inc. $2.25 million in a June 2016 settlement that also required $716,000 in restitution, admonishing the firm in a press release for “the absence of any meaningful compliance effort,” while LPL Financial LLC agreed in 2015 to pay a $10 million fine and $1.66 million in restitution to customers who purchased nontraditional ETFs from the firm.

SEC staff initially approved a pair of quadruple-leveraged ETFs this spring, the most highly leveraged ETFs yet approved for U.S. markets, but the commission elected to reconsider that decision in May.

FINRA declined to comment on Jordan’s settlement.

FINRA is represented by Michael P. Manly.

Jordan is not represented by counsel.

The case is Re: Jay Dee Jordan, case number 2015046728802, before the Financial Industry Regulatory Authority.