SEC settles with company over ETP implementation failure

Securities Enforcement SEC Investigations

On July 19, the SEC announced a settlement with a financial services company for its role in alleged compliance failures connected to volatility-linked-exchange traded products (ETPs). According to the order, the issuer of the ETP, which was designed to track short-term volatility expectations in the market as measured against derivatives of a volatility index, warned the company that it was not suitable to hold the product for extended periods of time, and that the product’s offering documents proved that the product’s value was likely to decline. The SEC alleged that the company violated the Advisers Act and Advisers Act Rule, such as Section 206(4), because the company failed to adopt reasonably designed written policies and procedures directed at ETPs and failed to implement its existing policies and procedures. The order includes allegations that the company prohibited brokerage representatives from soliciting sales of the product and placed other sales restrictions of the product, but did not place similar restrictions on some financial advisers’ use of the product in discretionary managed client accounts. The order further noted that the company allegedly adopted a concentration limit on ETPs but failed to implement a system for monitoring and enforcing that limit for five years. The order, which the company consented to without admitting or denying the findings, imposes a civil money penalty of approximately $8 million and $96,344 in disgorgement, and requires the company to cease and desist from committing or causing any future violations of Section 206(4) of the Advisers Act and Advisers Act Rule.