VIX or VXX? SEC alleges BD reps didn’t understand products

Five firms agreed to pay a combined $3M to settle unsuitable short-term futures
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For certain advisors at five prominent wealth managers, exclusively short term products were allegedly part of the long term investment plan.

At least that’s what the SEC says. The regulator brought cases alleging unsuitable sales of volatility-linked products against five firms: one of the biggest enterprises with Cetera Financial Group, Advisor Group’s two largest independent broker-dealers, Benjamin F. Edwards and American Portfolios Financial Services. The firms agreed to pay more than a combined $3 million to settle the SEC charges, according to the regulator, which issued the settlement orders on Nov. 13.

The SEC accuses the firms’ registered representatives of simply not understanding the products they recommended as a hedge against equity volatility. Across 744 accounts over a span of more than four years, reps recommended that clients buy complex exchange-traded notes and ETFs and hold them for months, or even years, according to the SEC. The three products involved in the cases have names that include words like “daily” or “short term,” such as the iPath S&P 500 VIX Short-Term Futures ETN.

The five settlements represent the first cases under a new Division of Enforcement program tracking analytical data about exchange-traded product sales.

“It is important for firms to put the appropriate protections in place to ensure complex products are properly evaluated and understood by their representatives,” SEC Enforcement Director Stephanie Avakian said in a statement. “Failing to do so puts investors at risk.”

Benjamin F. Edwards agreed to the largest payout at $685,134. One of the firm’s clients allegedly lost $71,000 — or about 39% of their investment — after their account held the “VXX” product for seven months. An attorney who represented the firm declined to comment on the allegations.

The SEC ordered American Portfolios and its RIA, American Portfolios Advisors, to pay $653,072. Its reps had a “had a flawed understanding — and thus a flawed investment philosophy — regarding VXX,” according to the SEC. The firm didn’t respond to inquiries.

Summit Financial Group is an RIA that shuttered its IBD last year in order to fold into Cetera’s largest one, Cetera Advisor Networks. One Summit rep was responsible for nearly half of the client losses from unsuitable VXX sales, investigators say. Summit has since banned the products involved with the SEC case, according to the firm, which is paying $603,799 to settle it.

“The matter has been promptly settled by [Summit Financial] in full cooperation with and to the satisfaction of the SEC,” Cetera spokesman Sean Mogle said in an emailed statement.

Advisor Group’s Royal Alliance Associates and Securities America Advisors agreed to pay a combined $1.1 million. Just two Securities America clients lost a combined $292,000 on investments after their accounts held on to two other products over long periods that are similar to VXX, according to the SEC. The IBD network didn’t respond to requests for comment.

It’s possible the reps may have confused the relationship between the complex and risky VXX products and the Cboe volatility index, also known as the VIX. Instead of a direct link, the VXX is connected with the price of VIX futures contracts, the SEC notes in several of the orders.

“Thus, the futures index does not purport to track or measure implied volatility in the medium or long term, as its name —’Short-Term’ — implies,” according to the SEC.

“The VIX index will perform differently than the futures index and in certain cases may have positive performance during periods while the futures index is experiencing poor performance,” the orders continue. “In turn, an investment in VXX may experience a significant decline in value over time, the risk of which increases the longer that VXX is held.”

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Compliance Enforcement SEC enforcement Independent BDs Regional BDs SEC Cetera Financial Group Advisor Group Benjamin Edwards Regulatory guidance
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