While sanctions totaling nearly $125,000 might be “chump change” for some of the largest financial institutions, it’s no small matter for Griffinest Asia. The Pasadena, CA advisory firm, with 25 members, is an introducing broker-dealer serving retail and institutional customers. It has been a member of the Financial Industry Regulatory Authority (FINRA) since December 2004. And until this fall, the firm had no relevant disciplinary history with other regulatory organizations.

Can poor WSPs bring down an otherwise unblemished firm?

Yes, it can. And it did.

Between July 2016 and November 2018, Griffinest Asia failed to establish, maintain, and enforce a supervisory system and written supervisory procedures (WSPs) to supervise trades in Non-Traditional Exchange Traded Products (ETPs).

What is the big deal about non-traditional ETPs?

By way of background, non-traditional ETPs are designed to return a multiple of an underlying index or benchmark, the inverse of that benchmark, or both, over only the course of one trading session—usually a single day. They typically rebalance their portfolios on a daily basis (also known as the “daily reset”). Otherwise, the effects of compounding of daily returns during the holding period can impact non-traditional ETPs’ performance causing the returns of their underlying index or benchmark to differ from those held for the predetermined time period.

Risky and complex products, particularly in volatile markets, FINRA advises broker-dealers that non-traditional ETPs typically are unsuitable for retail investors who plan to hold them for more than a single trading session. And since 2009, the Authority has reminded member firms that they must establish a reasonable supervisory system to ensure their members comply with FINRA and Securities and Exchange Commission (SEC) rules. At issue was the risk that unwary investors might sufficiently understand these investments’ risks or monitor the accounts sufficiently.

Failure to supervise rogue reps cost Griffinest Asia clients dearly

Between July 2016 and November 2018, two Griffinest Asia registered representatives executed 58 discretionary non-traditional ETPS trades in seven retail accounts held by six customers. They completed 32 purchases and 26 sales with a total principal value of approximately $750,000 and held those investments in those customer accounts for periods ranging from 41 to 479 days. Griffinest Asia harvested $2,982.84 in commissions and fees. The clients realized losses of $86,185.65.

Was $2,982.84 in commissions worth noncompliance?

Of course not in hindsight.

Griffinest Asia failed to establish, maintain, and enforce a supervisory system and WSPs reasonably designed to ensure that non-traditional ETPs’ sales complied with applicable securities laws and regulations and FINRA rules. Moreover, neither the firm nor its representatives reviewed whether these investments were suitable for its retail customers. There was no oversight, nor did the firm provide any formal training regarding non-traditional ETPs to its registered representatives

In response to these failings, FINRA imposed:

• A censure;
• A $35,000 fine;
• Disgorgement of commissions and fees in the amount of $2,982.84, plus interest,
• as described below; and
• Restitution of $86,185.65, plus interest

 Wouldn’t compliance have been so much less costly?

Of course! And that’s where Patrina could have helped because size is irrelevant when bad actors are acting badly.

For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, comprehensive, 8-module compliance solution, compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk.