Failing to properly supervise their reps’ solicited sales of non-traditional ETFs, among other improper actions, has cost Sanctuary Securities a censure and more than a half-million dollars in fines and restitution.
FINRA ordered the fast-growing broker-dealer with multiple custodian relationships to pay $530,161 — a $160,000 fine and restitution of $370,161, with interest. Sanctuary failed to establish and maintain a sufficient supervisory system in relation to solicited sales of the products and of their unique features and risks, according to a July 1 FINRA
“The firm did not have a reasonable supervisory system for reviewing representatives’ recommendations to purchase NT-ETFs based on a customer’s age, investment objective, risk tolerance or financial profile, including net worth,” according to the FINRA letter.
The fine and restitution are ”paltry in comparison,” says Benjamin Edwards, associate professor of law at University of Nevada, Las Vegas, William S. Boyd School of Law, whose areas of expertise are business and securities law, corporate governance and consumer protection.“If that same money had been invested appropriately, and [clients] given the advice they should have received, they would have probably doubled their account” during that time period.
According to FINRA, Sanctuary also failed to review outside business activities of certain representatives and did not terminate a securities offering that failed to meet the minimum contingency requirement, among other allegations.
The alleged actions occurred from 2014 through 2018, when the firm was registered as David A. Noyes and Company, a Chicago-based broker-dealer. In March 2020, the firm’s name was changed to Sanctuary Securities.
A spokesperson for Sanctuary says the actions outlined by FINRA predate the acquisition of Noyes and the current executive management team of Sanctuary Securities.
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“No former Noyes executives or employees that were involved in these matters are employed by [parent company] Sanctuary Wealth. None of these matters were disclosed as part of the reps and warranties prior to the acquisition,” the spokesperson says.
Edwards notes that the defense makes a point, but says the firm’s brokers had been acting recklessly “for a very long time.”
“The firm really should have caught this. But it’s really on the individual brokers who were selling the products,” Edwards says. “[Going forward] new management has a tough challenge, when you have that level of disregard for protecting your clients and their investors. You really have to do a lot to change that culture. That's probably going to include letting people go.”
From January 2014 through December 2018, 30 registered representatives recommended $5 million worth of NT-ETFs to retail customers, generating $60,000 in commissions. Sanctuary executed at least 600 NT-ETF purchases in about 150 retail customer accounts.
"These non-traditional ETFs are built to facilitate day trading," Edwards says. "Holding them for an extended period of time in a retail account is not what they were designed to do.”
He adds: “It is not used to hedge against risk in any kind of long term. No reasonably competent stockbroker would ever recommend this.”
Supervisory fail
The FINRA letter also alleges that “Although the firm’s supervisory system incorporated exception reports and alerts as part of its routine electronic trade review system, none of those exception reports or alerts were designed or used to surveil for the unique risks posed by NT-ETFs. Additionally, the firm’s electronic trade review system was not designed to identify NT-ETF transactions held for longer periods ... As a result, the firm’s customers held positions in NT-ETFs for extended periods, spanning from weeks to years in many instances, causing significant losses.”
Sanctuary custodies with Charles Schwab, TD Ameritrade, Fidelity and BNY Mellon Pershing, according to its
Edwards adds that he hopes other firms selling non-traditional ETFs will learn from Sanctuary’s woes. “These are the kinds of products that you need to have an eye on, not just when they're going into a customer's account, but how long they've been in that customer account.”
More allegations
Additionally, FINRA says Sanctuary also failed to review the outside business activities of 15 of its registered representatives. Those reps were hired from January 2017 to January 2019, and though they disclosed outside business activities in writing, Sanctuary never evaluated them.
The regulator also alleges the firm broke FINRA rules when it distributed sales materials in relation to three private placement offerings — all sponsored by the same issuer — that contained prohibited performance projections in 2018. Furthermore, FINRA says Sanctuary failed to file offering documents related to eight private placements sold by the firm’s registered representatives, in violation of FINRA Rules 5123 and 2010.
In a specific instance, FINRA alleges that Sanctuary failed to terminate an offering of securities to raise $6 million for a Kentucky senior living facility when the minimum contingency requirement of $5 million was not met, and return the funds to investors, with interest, as it was required to do.
“Rather,” the FINRA document states, “The firm continued to solicit investments in the LLF offering, under a modified [private placement memorandum] that improperly extended the termination date … and reduced the minimum contingency to $4 million.”
The firm failed to raise that amount as well.
“That’s a problem,” Edwards says. “That’s just wrong.”
Sanctuary did not admit or deny the findings in the FINRA letter. The company was ordered to pay restitution to over 40 customers.
