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866 Trades in 15 Leveraged ETFs for 47 Customers Ends With 1 Bar
May 14, 2019
In a recent regulatory settlement, FINRA barred a former registered representative, who had become a nonregistered, associated person. Yeah, a nonregistered, associated person. And that nonregistered, associated person respondent somehow managed to get involved with the solicitation and execution of 866 securities transactions involving 15 different non-traditional ETFs with at least 47 customers.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Dominic Tropiano submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Dominic Tropiano, Respondent (FINRA AWC 2016051098501, May 9, 2019).
http://www.finra.org/sites/default/files/fda_documents/2016051098501
%20Dominic%20Tropiano%20CRD%204761462%20AWC%20jm.pdf
%20Dominic%20Tropiano%20CRD%204761462%20AWC%20jm.pdf
[B]etween July 2008 and April 2015, Tropiano was associated as a General Securities Representative with Key Investment Services LLC (CRD #1363000) ("KIS"), a FINRA member firm. In May 2015, Tropiano engaged in a securities business and became a nonregistered, associated person with America Northcoast Securities, Inc. ("America Northcoast"), a FINRA member firm. Between May 9, 2016 and June 10, 2016, Tropiano was associated as a General Securities Representative with America Northcoast. Since then, Tropiano has not been associated with another FINRA-regulated firm. However, America Northcoast filed an amended Form U5 disclosing new information on May 24, 2017. Therefore, although Tropiano is not currently associated with a FINRA member firm or registered with FINRA, he remains subject to FINRA's jurisdiction, pursuant to Article V, Section 4 of FINRA's By-Laws, until May 23, 2019.
Let's re-state that fascinating role: a "nonregistered, associated person. . ." Sure, okay, ummm, what? He's engaging in a securities business but he's not registered? Oh my, like that's not going to be a harbinger of any problems. Yeah, right.
866 Transactions / 15 ETFs / 47 Customers
The AWC asserts in part that:
Between May 2015 and April 2016, Tropiano solicited and placed 866 securities transactions, involving 15 different non-traditional ETFs, with at least 47 customers of American Northcoast. Tropiano lacked a fundamental understanding of the unique risks, terms and features of the non-traditional ETFs he recommended his customers buy or sell between May 2015 and April 2016. For example, Tropiano did not understand the daily reset feature, the compounding of the "tracking error" (the divergence between the non-traditional ETF's price and the price of the index or benchmark), and the various other risks of the products, including the daily exchange rate risk and the volatility of the underlying swap agreements, futures contracts, and options.
Unsuitable Recommendations
As set forth in part in the AWC:
From May 2015 to June 2016, Tropiano recommended non-traditional ETFs to at least 47 customers who had opened accounts at America Northcoast. Tropiano did not have reasonable grounds to believe that these highly complex products were suitable for those customers, in view of their investment profiles, which included conservative investment objectives.By virtue of the foregoing, Respondent violated FINRA Rules 2111 and 2010.
Unauthorized Trading
The AWC asserts in part that:
Between May and September 2015, Tropiano caused 33 non-traditional ETF transactions to be effected in customer M.C.'s securities account, and 19 nontraditional ETF transactions to be placed in I.C.'s securities account; without the knowledge or consent of either customer, and in the absence of written or oral authorization to place such trades.By virtue of the foregoing, Respondent violated FINRA Rule 2010.
Unregistered Activity
Tropiano's father-in-law, R.B., was the Chairman and Chief Financial Officer for America Northcoast. R.B. hired Tropiano to help with research at a non-member affiliate of America Northcoast, in May 2015. The affiliate and America Northcoast shared office space, and Tropiano's desk was next to that of his brother-in-law, C.B., who was the President and Chief Compliance Officer for American Northcoast.Shortly after Tropiano began working at American Northcoast in May 2015, KIS customers began contacting Tropiano for investment advice. Tropiano asked C.B. whether he should refer the customers to a different broker-dealer, since he was not registered with American Northcoast. Instead, C.B. told Tropiano to "bring the accounts" to the firm. As a result, between May 2015 and April 2016, at least 47 individuals who had been securities customers at KIS opened securities accounts at America Northcoast, with C.B. listed as the representative of record.1In addition, between May 2015 and April 2016, Tropiano provided investment advice to these customers and recommended the purchase and sale of securities for their accounts. Specifically, Tropiano solicited approximately 866 transactions involving non-traditional ETFs for the accounts of at least 47 former KIS customers, while he was not registered in any capacity at America Northcoast.By engaging in securities business while not registered with a FINRA member firm, Tropiano violated NASD Rule 1031 and FINRA Rule 2010.====Footnote 1: When Tropiano left KIS on April 20, 2015, he was bound by a non-solicitation agreement he had signed with KIS, which by its terms prevented him from directly or indirectly calling upon, soliciting, or doing business with any KIS customer for one year, or until April 19, 2016.
Sanctions
In accordance with the terms of the AWC, FINRA inposed upon Tropiano a Bar from association with any FINRA member in any capacity.
Bill Singer's Comment
Compliments to FINRA on a superb and lucid rendition of the underlying facts in this AWC, which are by no means easy to present. The well-crafted nature of this AWC accounts for my extensive use of extracts from the settlement document. Nice job!
In recent years, Wall Street's regulators have admonished the industry to be more attentive to sales practices attendant to so-called non-traditional/leveraged/inverse ETFs.
http://www.finra.org/sites/default/files/NoticeDocument/p118952.pdfIn the Executive Summary of the FINRA NTM 09-31:
Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track -- or both -- are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.This Notice reminds firms of their sales practice obligations in connection with leveraged and inverse ETFs. In particular, recommendations to customers must be suitable and based on a full understanding of the terms and features of the product recommended; sales materials related to leveraged and inverse ETFs must be fair and accurate; and firms must have adequate supervisory procedures in place to ensure that these obligations are met. . .
Notwithstanding the AWC's assertion that "Tropiano has no relevant disciplinary history," Tropiano does have quite a record of other history. As set forth in FINRA's online BrokerCheck report as of May 14, 2019, under the heading "Customer Dispute -- Settled," we find that Key Investment Services, LLC disclosed a customer complaint seeking $120,000 and alleging :
Client alleges the RR's recommendations to purchase various mutual funds totaling $446,740 from 2014 to March 2015 were unsuitable.
The BrokerCheck record asserts that Key Investment Services denied the customer complaint on May 20, 2016, and, thereafter, the customer filed a FINRA Arbitration Statement of Claim on November 20, 2016. The member firm settled the Arbitration for $85,000 to which Tropiano made no contribution. Tropiano submitted the following statement of the underlying allegations:
Oh . . . but wait . . . don't go away just yet. Under the BrokerCheck heading "Customer Dispute - Closed No-Action / Withdrawn/ Dismissed / Denied," we are informed that on August 7, 2014, Key Investment Services received a customer complaint seeking $36,000 and alleging:Unsuitability. Client invested with Mr. Tropiano on 3 separate occasions. First time in 2012 had similar investments which were suitable. Second time client did similar investments and added more money to the same investments. Based on age, net worth and risk, investments were suitable. Client only made complaint when market dropped in January 2016.
CLIENT ALLEGES THE REGISTERED REPRESENTATIVE MISREPRESENTED THE FEATURES OF A UNIVERSAL LIFE INSURANCE POLICY THAT WAS PURCHASED IN MAY OF 2012.
The BrokerCheck report discloses that the member firm denied the complaint on August 27, 2014.
Oh . . . but wait . . . again, don't go away just yet. Under the BrokerCheck heading "Customer Dispute - Pending" we are informed that there are 6 events involving Tropiano's tenure with America Northcoast Securities, Inc. The complaints have all evolved into FINRA Arbitrations involving leveraged ETF trades in 2015 and 2016, with damages sought of $250,000; $150,000; $100,000; $800,000; $400,000; and $330,000. One could say that America Northcoast Securities got walloped by Tropiano's former clients and/or referrals. For some employers, the complaints and lawsuits may have fallen from the rafters as sandbags or landed as a blind-sided punch; on the other hand, let's not forget this tidbit from the AWC:
Tropiano's father-in-law, R.B., was the Chairman and Chief Financial Officer for America Northcoast. R.B. hired Tropiano to help with research at a non-member affiliate of America Northcoast, in May 2015. The affiliate and America Northcoast shared office space, and Tropiano's desk was next to that of his brother-in-law, C.B., who was the President and Chief Compliance Officer for American Northcoast.
When Tropiano left KIS on April 20, 2015, he was bound by a non-solicitation agreement he had signed with KIS, which by its terms prevented him from directly or indirectly calling upon, soliciting, or doing business with any KIS customer for one year, or until April 19, 2016.
Shortly after Tropiano began working at American Northcoast in May 2015, KIS customers began contacting Tropiano for investment advice. Tropiano asked C.B. whether he should refer the customers to a different broker-dealer, since he was not registered with American Northcoast. Instead, C.B. told Tropiano to "bring the accounts" to the firm. . . .