SEC has taken action against Royal Alliance Associates

The Securities and Exchange Commission (SEC) has taken action against Royal Alliance Associates (RAA) due to substantial losses suffered by advisory clients holding the iPath S&P 500 VIX Short-Term Futures ETN, commonly known as VXX. The SEC has imposed a fine of over $500,000 on RAA for its failure to establish and implement effective policies and procedures to prevent unsuitable investments in volatility-linked exchange-traded products (ETPs).

According to the cease-and-desist order 3-20152, the SEC found that RAA’s investment adviser representatives exercised discretionary authority over client accounts, resulting in the purchase and prolonged holding of the complex VXX exchange-traded note (ETN). These actions were inconsistent with the intended purpose of the product as stated in its offering materials, leading to significant losses for customers exposed to VXX.

Between 2016 and 2020, at least 108 RAA advisory client accounts held VXX for extended periods, ranging from several months to even years. This extended holding exposed clients to increased risk, ultimately leading to substantial losses.

RAA did have some policies and procedures in place to caution against holding risky complex and structured products for extended periods. These policies included a written supervisory procedure that required representatives to act in a manner consistent with the fiduciary duty owed to their clients. However, RAA lacked specific policies to monitor the implied volatility of the S&P 500 and failed to provide training to its representatives on volatility ETPs like VXX, despite being aware of their involvement in trading such products for clients.

The VIX, or volatility index, has been known to negatively impact investors with long-term investment goals and conservative or low-to-moderate risk tolerance preferences. Regulators have taken actions against various brokers, advisers, and brokerage firms for unsuitably recommending volatility products like VXX and Credit Suisse’s Velocity Shares Daily Inverse VIX Short-Term Exchange-Traded Note (“XIV”), which have proven to be harmful to customers.

In a similar instance, former Global Arena Capital broker James Flower faced suspension by FINRA in 2017 for unsuitably recommending the same Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX), resulting in losses exceeding $249,000 for 13 clients.

The SEC’s action against RAA serves as a reminder for financial firms to implement appropriate measures and training to ensure the suitability of investments, especially with regard to complex and high-risk products like VXX and other volatility-related ETPs.