October 20, 2020
On September 24, 2020, the Securities and Exchange Commission (SEC) released an Order Instituting Administrative Proceedings against Morgan Wilshire Securities, Inc., a broker-dealer headquartered in Garden City, New York, for failing to supervise certain registered representatives who made unsuitable recommendations to their customers.
The SEC claims that from January 1, 2015 to March 31, 2019, certain Morgan Wilshire registered representatives recommended non-leverage, inverse exchange-traded funds (inverse ETFs) to several retail brokerage customers without regard for holding period and without having a reasonable basis to believe these recommendations were suitable. Inverse ETFs seek investment results that are the opposite of the performance of an underlying index for a single day. When held longer than a day, investors can experience losses that exceed the inverse return of the index, especially in volatile markets. According to the allegations, in this case, Morgan Wilshire customers, based on its registered representatives’ recommendations, purchased and held inverse ETFs for longer than a single day, and in many cases, months and years.
The SEC further claims that Morgan Wilshire failed to implement its policies and procedures to supervise and prevent these violations of the Securities Act of 1933. The firm did not sufficiently train its registered representatives on the risks and of inverse ETFs or to determine their suitability for customers. Morgan Wilshire did not adequately review inverse ETF recommendations made by representatives, thus failing to supervise these registered representatives according to the Order.
In anticipation of the Order, Morgan Wilshire submitted an Offer of Settlement and agreed to a censure and to pay disgorgement totaling $87,609.09, prejudgment interest of $16,408.08, and a civil monetary penalty of $75,000.