Oppenheimer & Co., along with many other brokerage firms, has experienced a litany of regulatory issues. You can find a list of sanctions imposed by FINRA on the firm here and a list of SEC actions here.

New sanctions

On June 8, FINRA announced that it had sanctioned Oppenheimer $2.9 million for “selling leveraged, inverse and inverse-leveraged exchange-traded funds (non-traditional ETFs) to retail customers without reasonable supervision, and for recommending non-traditional ETFs that were not suitable.” The facts underlying these sanctions are particularly troubling.

According to FINRA, from August 2009 through September 30, 2013, more than 760 Oppenheimer representatives engaged in more than 30,000 non-traditional ETF transactions for customers. The aggregate amount involved in these transactions was approximately $1.7 billion.

The FINRA release provided shocking details showing how vulnerable investors were victimized by Oppenheimer representatives. These are only some of the more egregious examples:

  • An 89-year-old conservative customer with annual income of $50,000 held 96 solicited non-traditional ETF positions, resulting in a net loss of $51,847.
  • A 91-year-old conservative customer with an annual income of $30,000 held 56 solicited non-traditional ETF positions, resulting in a net loss of $11,161.
  • A 67-year-old conservative customer with an annual income of $40,000 held two solicited non-traditional ETF positions in her account for 729 days, resulting in a net loss of $2,746.

Unsuitability of non-traditional ETFs

Non-traditional ETFs shouldn’t be confused with low-management-fee traditional ETFs. Traditional ETFs track a designated index and can provide investors with broad diversification at a low cost. They resemble index funds, but differ in that they can be traded like common stocks. Many advisors (including me) recommend holding a broadly diversified portfolio of low-management-fee index funds, traditional ETFs or passively managed funds in a suitable asset allocation.

Both traditional ETFs and non-traditional ETFs track indexes, but the similarity ends there.

Purchasers of non-traditional ETFs assume many risks that investors holding traditional ETFs don’t have. These include volatility caused by leverage and daily resetting, which causes non-traditional ETFs to perform differently over time from the index or benchmark they are tracking. As a consequence, many believe non-traditional ETFs are “rarely appropriate for retail investors.”

The SEC provides helpful guidance for investors considering the purchase of non-traditional ETFs, which you can find here.

Given the risky nature of non-traditional ETFs, why would Oppenheimer representatives recommend them more than 30,000 times over the four-year period cited in the FINRA sanctions? It’s likely they were motivated by their compensation structure and acted without considering the best interest of their clients.

The commissions on the sale of non-traditional ETFs can be substantial. In another regulatory proceeding involving these products, FINRA found one broker at a different firm recommended the purchase of non-traditional ETFs 537 times to 66 customers. That broker generated $445,000 in commissions and $57,000 in sales charges.

I don’t know the aggregate commissions Oppenheimer “earned” on the purchase and sale of $1.7 billion in non-traditional ETFs. I suspect it was significantly more than the sanction imposed by FINRA. If I am correct, the sanction will not be any deterrent. It’s simply a cost of doing business.

Is behavior contagious?

It’s interesting to speculate about why more than 760 Oppenheimer representatives would recommend these unsuitable products to vulnerable clients. Perhaps the answer may be found in the culture of the firm. According to this study, Oppenheimer placed seventh on a list of the top 30 firms with 400 or more registered brokers ranked by the percentage of their brokers who had a history of causing harm to investors (as defined in the paper).

The firm employed 276 brokers, representing 12.45 percent of its total, who had a record of investor harm. It employed 92 brokers, representing 4.15 percent of its total, who were previously fired by other firms after allegations of investor harm were made against them.

The data in this study leads to the following observations:

  1. Some firms recruit and retain brokers who have engaged in misconduct.
  2. By employing these brokers, it’s possible they will have a toxic effect on the overall culture of these firms, resulting in more misconduct by existing brokers who have no prior record of misconduct.

All of this begs the question: Why are you entrusting a broker with your retirement assets in the first place?

An Endless Cycle of Broker Misconduct? blog was originally posted on The Huffington Post website.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is a New York Times bestselling author of the Smartest series of books, including The Smartest Investment Book You’ll Ever Read, The Smartest Retirement Book You’ll Ever Read and his latest, The Smartest Sales Book You’ll Ever Read. He is a wealth advisor with Buckingham and Director of Investor Advocacy for The BAM ALLIANCE.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.