Public records provided by the Financial Industry Regulatory Authority (FINRA) and accessed on October 9, 2017 indicate that former New Jersey-based brokerage firm Network 1 Financial Securities was recently sanctioned by FINRA (CRD# 13577) in connection to alleged rule violations in the recommendation and sale of non-traditional exchange-traded funds.
Established in Texas in 1983, Network 1 Financial Securities is headquartered in Red Bank, New jersey and registered with 48 US states and territories. Richard William Hunt is Chief Executive Officer; Richard William Hunt Jr. is President, Chief Operating Officer and Financial and Operations Principal; Michael Molinaro is Chief Compliance Officer; and Damon Testaverde is Vice President.
According to the firm’s BrokerCheck report, Network 1 Financial Securities was sanctioned by FINRA earlier this month following allegations the firm “failed to establish, maintain and enforce a supervisory system and written supervisory procedures (WSPs) reasonably designed to supervise representatives’ sales of leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs).”
FINRA’s findings stated further: “approximately 29 firm registered representatives traded non-traditional ETFs in 167 customer accounts. These representatives executed 645 non-traditional ETF transactions totaling approximately $48 million. The firm had inadequate WSPs regarding the suitability and supervision of ETFs.”
A letter of Acceptance, Waiver and Consent (No. 2015046575201) signed by the firm and submitted to FINRA clarifies: “from 2010 through November 21, 2013, Network 1 had no procedures addressing Non=Traditional ETFs. On November 22, 2013, the Firm added a section to its WSPs that included a general description of ETFs. This section mentioned some of the risks inherent in Non-Traditional ETFs, including that the performance of these products ‘can differ significantly from the underlying index or benchmark during the same time period.’ However, this new section did not provide any guidance to the Firm’s supervisors regarding how they should supervise Non-Traditional ETFs in light of the unique features and risks inherent in these products. Moreover, throughout the Relevant Period, Network 1 did not have an adequate system for the review of Non-Traditional ETF transactions to ensure their suitability.” For the foregoing conduct, the firm was censured and issued a fine of $20,000.
Exchange traded funds, or ETFs, contain a portfolio of shares that track market indices like the Dow Jones or the S&P 500. Alternately, they may follow only a particular segment of the market, such as energy or pharmaceutical sectors. If one of those particular indexes is performing well, the corresponding exchange traded fund will mirror that trend. It will also parallel a downward trend, unfortunately, and significant losses may result for people who have invested in it. Non-traditional ETFS differ from traditional ETFs, according to FINRA, “in that they seek to deliver multiples of the performance of the underlying index or benchmark, the inverse of that performance, or both,” often by using “swaps, futures contracts, and other derivative instruments.” They come with significant risks that traditional ETFs do not, and as such may not be suitable for investors with more conservative risk profiles. Investment professionals who recommend unsuitable ETFs may be subject to disciplinary action by FINRA or the Securities and Exchange Commission.
Investors considering investments in non-traditional exchange-traded funds can research the products on FINRA’s investor resources, and can research the backgrounds of FINRA-licensed broker-dealer firms using the BrokerCheck tool.