Lubbock Brokerage Firm Subject of Fine by Texas Securities Regulators
Investors who have suffered losses in leveraged and/or inverse exchange-traded funds (ETFs), sometimes referred to as Non-Traditional ETFs, may be able to pursue recovery of losses through FINRA arbitration or securities litigation, if the broker recommending the investment failed to perform adequate due diligence on the ETF, or if the recommendation was unsuitable based on an investor’s stated objectives and risk profile.
On August 2, 2019, Texas securities regulators entered a Disciplinary Order (Order) reprimanding William H. Lowell, former President of now-defunct Lowell & Company, Inc., a Lubbock-based financial advisory firm. Specifically, William Lowell agreed to a monetary fine of $40,000 in connection with the recommendation of certain Non-Traditional ETFs by an investment advisor formerly affiliated with his firm, Ms. Jody Bryant Bowers. Ms. Bowers was previously affiliated with Lowell & Company, Inc. until June 2018. As of the date of this writing, Jody Bowers has disclosed two customer disputes, each of which settled, in an aggregate amount of $645,000. These disputes concern allegations of unsuitable investment recommendations and misrepresentations.
Texas securities regulators, through their Order and imposition of a fine against Lowell & Company, issued the following cautionary guidance concerning risky and complex leveraged ETFs: “Leveraged ETFs are securities that use financial derivatives and debt to amplify the returns of an underlying index. Leveraged ETFs are typically used to speculate on an index, or to take advantage of the index’s short-term momentum. Due to the high-risk, high-cost structure of leveraged ETFs, they are rarely used as long-term investments. In many cases, positions in leveraged ETFs are held for a few days, or less.”
Unfortunately, in those instances where Non-Traditional ETFs, including Proshares Ultra VIX Short-Term Futures ETF (“UVXY”), are held for numerous trading sessions consecutively, losses can mount quickly and spiral out of control amidst heightened market volatility. National securities regulators, including the SEC and FINRA, have also issued cautionary guidance on so-called Non-Traditional ETFs. Put simply, Non-Traditional ETFs are extremely complicated and risky financial products. Because they are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day), they are not intended to be held for more than a single trading session. As FINRA has cautioned through Regulatory Notice 09-31:
“[t]he performance of Non-Traditional ETFs over periods of time longer than a single trading session ‘can differ significantly from the performance… of their underlying index or benchmark during the same period of time.”
In addition, because of the inherent complexities and risks associated with Non-Traditional ETFs, FINRA has further advised through Regulatory Notice 09-31 that Non-Traditional ETFs “[a]re typically not suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.”
Firms like Lowell & Company, Inc. have a duty under NASD Rule 2310 and FINRA Rule 2111 -- the suitability rule -- to, among other things, perform reasonable diligence to understand the nature of the recommended security. This due diligence “[w]ith respect to leveraged and inverse ETFs… means that a firm must understand the terms and features of the funds, including how they are designed to perform, how they achieve that objective, and the impact that market volatility, the ETFs use of leverage, and the customer’s intended holding period will have on their performance.”
If you have suffered losses in a Non-Traditional ETF, such as Proshares Ultra VIX Short-Term Futures ETF (“UVXY”) based on a financial advisor’s recommendation, you may be able to pursue recovery of your losses through securities arbitration or litigation. Please contact Giarrusso Law Group LLC by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost and no-obligation consultation.