Two subsidiaries of Stifel Financial Corp. agreed to pay a collective total of about $2.3 million over alleged violations of Financial Industry Regulatory Authority (FINRA) rules regarding nontraditional exchange-traded products (NT-ETPs).

Stifel, Nicolaus & Company and Stifel Independent Advisors (SIA) each agreed to be censured and pay total fines of $1 million and nearly $1.3 million in combined restitution, FINRA announced in its order Monday.

FINRA said the firms failed to establish, maintain, and enforce supervisory systems, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with their suitability obligations. In January 2014, the firms were ordered to pay more than $1 million over similar alleged violations.

The details: In the six months following the January 2014 order, the firms took steps to address their supervision of NT-ETPs, including revising their WSPs and implementing new automated alerts to monitor NT-ETP holding periods.

However, from June 2014 through March 2018, the firms’ supervisory system was still not reasonably designed, FINRA alleged.

The WSPs still failed to provide reasonable guidance about how to identify and address potentially unsuitable NT-ETP recommendations. NT-ETPs are designed to be held for only short periods of time, typically a day to a month, but Stifel failed to take reasonable steps to detect and address hundreds of potentially unsuitable recommendations that customers buy and hold them for longer periods of time, according to FINRA.

The WSPs did not require supervisors to assess whether NT-ETP recommendations were consistent with the intended holding periods identified in the products’ prospectuses, per the order.

In May 2014, the firms implemented a 30-day alert system but almost immediately deactivated it after receiving 2,000 hits per day, FINRA said. In total, the alert system remained inactive for approximately eight months, FINRA alleged.

Compliance considerations: In August 2016, Stifel’s compliance department discovered the alleged NT-ETP issues, a practice it referred to as “‘product misuse,’” per the order.

In response, it started tracking NT-ETP positions held for more than 30 days and encouraging supervisors to speak with representatives and customers about selling aged positions.

This was not sufficient in certain instances to prevent further misconduct, until SIA started prohibiting solicited sales in November 2017 and Stifel Nicolaus did in March 2018, FINRA said.

A Stifel spokesperson declined to comment when reached via email. The firms agreed to settle without admitting or denying FINRA’s findings.

Jeff Dale is Managing Editor, Editorial Projects and Analytics, at Compliance Week. He previously served as Compliance Week's Digital Editor and has worked as a copy editor at the Boston Herald and city editor at The Hour Publishing Co. in Norwalk, Conn.View full Profile

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