Targeted Examination Request

May 2009

RE: Exchange Traded Funds

The Strategic Programs Group of FINRA's Enforcement Department is conducting an inquiry regarding sales of inverse, leveraged, and inverse-leveraged Exchange Traded Funds ("ETFs") that are correlated to the daily performance of benchmark indices ("responsive ETFs"). In connection with our inquiry, and pursuant to FINRA Rule 8210, we request that the Firm provide the following documents and information to no later than June 12, 2009. This request is for documentation and information for the time period October 1, 2008 to March 30, 2009 ("the review period"):

 

  1. An Excel spreadsheet in electronic format containing the following information about retail customer transactions1 in responsive ETFs where the customer held the product for over 10 business days between the purchase and any liquidating transaction (responsive transactions).2 Include each purchase and full or partial liquidating transaction related to the responsive transactions. Your response should include the following columns:
    1. Account Name (if individual: last name, first name);
    2. Ticker symbol of the responsive ETF;
    3. Purchase or Sale;
    4. Date of transaction;
    5. Number of shares;
    6. Price;
    7. Principal amount of the transaction;
    8. Net amount of the transaction;
    9. Commission or Mark-up/Mark-down;
    10. Principal or Agency;
    11. Solicited or Unsolicited; and
    12. Registered representative identification number;

  2. For each responsive ETF identified in Item 1, provide an electronic copy of the prospectus or offering document that was in effect during the review period;

  3. Copies of all presentation materials, marketing materials, scripts, PowerPoint presentations, advertisements and sales literature concerning or referring to the ETFs identified in Item 1 that were intended for or provided to customers. In addition, provide a schedule which includes: a description or title of the material, author of the material, date the material was approved for use, name of the individual that approved the material, time period the material was used, volume of distribution, and type of customers to whom it was distributed;

  4. Copies of all presentation material, marketing material and training material concerning or referring to the ETFs identified in Item 1 that were provided to registered representatives of the Firm. In addition, provide a schedule which includes: a description or title of the material, author of the material, date the material was approved for use, name of the individual(s) that approved the material, time period the material was used, and volume of distribution;

  5. Copies of each type of customer communication, not provided in response to Items 3 or 4, that disclosed or discussed the risks associated with the ETFs identified in Item 1. In addition, provide a schedule which includes: a description or title of the material, author of the material, date the material was approved for use, name of the individual that approved the material, time period the material was used, volume of distribution, and type of customers to whom it was distributed;

  6. A listing of all Firm exception reports used by the Firm during the review period that refer to, relate to, or concern the responsive ETFs. At a minimum, provide the title of the report, its purpose, a description of the information available on the report, the frequency that the report was produced (e.g. monthly, daily, etc.), and name of individual(s) responsible for supervisory review of each report. If no exception reports are utilized, provide a written description of how the Firm monitors transactions in responsive ETFs.

  7. Copies of all customer complaints and arbitration / litigation claims relating to, referring to, or concerning responsive ETFs received during the review period. Please also provide a copy of the Firm's response;

  8. All Written Supervisory Procedures addressing the supervision and suitability review process for the sale of responsive ETFs. If not included within the procedures, provide a written description of the documents reviewed, the names of individuals responsible for the review, the reviewer's title and departments, and a description of the basis upon which the final suitability determination is made. Include in the description, any Firm requirements concerning income level, net worth, risk tolerance, investment experience, investment time horizon and other suitability factors considered;

  9. A list which provides the full legal name and CRD number of each representative associated with the registered representative numbers provided in Item 1(l);


 

1 For the purposes of this response a retail customer is defined as individuals, charities, and small to medium sized businesses with accounts of $10 million dollars or less on a monthly basis.

 

2 If there are several purchases made during the review period, provide a separate record for each purchase. If the liquidation was partial or made over several transactions, provide the dates of each sale. If there are several purchases and liquidations during the review period that overlap, use a First In, First Out (FIFO) methodology to calculate the relevant dates.