Multiple SEC Firms


December 16, 2020

Type of alert:

SEC Cease-and-Desist  

On November 13, 2020, the Securities and Exchange Commission (SEC) released Cease-and-Desist orders against four investment advisers for failing to supervise and implement policies and procedures reasonably designed to prevent investments in complex exchange-traded products (ETPs) that were not suitable for clients. The respondents are Benjamin F. Edwards & Company, Inc., Royal Alliance Associates, Inc., American Portfolios Financial Services, Inc. (APFS) and American Portfolio Advisors, Inc. (APA), and Securities America Advisors, Inc., which are headquartered in St. Louis, Missouri, Jersey City, New Jersey, Holbrook, New York, and La Vista, Nebraska, respectively.

Starting in at least January 2016, the SEC asserts that these firms failed to reasonably supervise certain registered representatives who made unsuitable recommendations of buying and holding for extended periods two complex ETPs: (1) the iPath S&P 500 VIX Short-Term Futures ETN (ticker symbol “VXX”); and (2) the ProShares VIX Short-Term Futures ETF (ticker symbol “VIXY”). The VIX attempts to track the expected volatility of the S&P 500, not the price level of the S&P 500 itself. The offering disclosed that “VIX futures have frequently exhibited very high contango in the past, resulting in a significant cost to ‘roll’ the futures,” and, as a result, the Futures Index may experience significant declines over longer periods.

Despite the offering documents disclosing the higher risk of significant losses if these complex ETPs were held for extended periods of time, the firms’ representatives recommended clients hold these ETPs for several months to years. For example, at least 108 accounts of Royal Alliance’s customers held VXX for several months to years between January 2016 and April 2020.

Between January 2016 and February 2018, representatives at Securities America Advisors were recommending that customers hold VXX, VIXY, and a potentially volatile security called the Velocity Shares Daily Inverse VIX Short Term ETNs linked to the S&P 500 VIX Short-Term Futures Index (“XIV”) and VIXY.

Representatives at APFS allegedly recommended VXX because “media commentators and others predicted that political events, including the upcoming general election, would generate volatility and fear and, as a possible result, declines in the market.” These representatives recommended VXX as a hedge or diversification against a downturn market; a flawed investment strategy and reasoning that representatives from other firms also communicated to their customers.

The SEC asserts that these firms also failed to adopt and implement policies and procedures designed to prevent unsuitable investments in ETPs, and in doing so, numerous representatives used discretionary authority over customer accounts to buy and hold the these volatile ETPs. Hundreds of customers experienced significant losses due to these poor recommendations.

The SEC charged the firms with numerous violations under the Exchange Act and Advisers Act. The SEC ordered the firms cease and desist from committing or causing any violations and future violations of the Advisers Act and Exchange Act. The SEC ordered all firms to pay disgorgement, prejudgment interest, and a civil monetary penalty between $500,000 and $685,000 each.

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