(By Mani) The Financial Industry
Regulatory Authority (FINRA) has slapped a fine of more than $9 million on four
of the country's biggest banks for selling leveraged and inverse
exchange-traded funds (ETFs) without reasonable supervision and for not having
a reasonable basis for recommending the securities.
The firms -- Citigroup Global
Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells
Fargo Advisors, LLC – neither admitted nor denied the allegations, but
consented to the entry of the regulator's findings.
FINRA, the largest
independent regulator for all securities firms doing business in the United
States, said the firms were fined more than $7.3 million and are required to
pay a total of $1.8 million in restitution to certain customers who made
unsuitable leveraged and inverse ETF purchases.
Wells Fargo topped the list
with a fine of $2.1 million, followed by Citigroup ($2 million), Morgan Stanley
($1.75 million) and UBS ($1.5 million).
An exchange-traded fund
(ETF) is an investment fund traded on stock exchanges, much like stocks. Most
ETFs track an index, such as the S&P 500, and they may be attractive as
investments due to their low costs, tax efficiency, and stock like features.
Leveraged ETFs seek to
deliver multiples of the performance of the index or benchmark they track. Inverse
ETFs seek to deliver the opposite of the performance of the index or benchmark
they track. Investor can profit from the short positions in derivatives, in a
However, both leveraged and
inverse ETFs have certain risks not found in traditional ETFs, such as the
risks associated with a daily reset, leverage and compounding. Accordingly,
investors were subjected to the risk that the performance of their investments
in leveraged and inverse ETFs could differ significantly from the performance
of the underlying index or benchmark when held for longer periods of time,
particularly in the volatile markets that existed during January 2008 through
FINRA found that from
January 2008 through June 2009, the firms did not have adequate supervisory
systems in place to monitor the sale of leveraged and inverse ETFs, and failed
to conduct adequate due diligence over the risks and features of the ETFs.
FINRA alleged that the firms
advisers made unsuitable recommendations of leveraged and inverse ETFs to some
customers with conservative investment objectives and/or risk profiles. Each of
the four firms sold billions of dollars of these ETFs to customers, some of
whom held them for extended periods when the markets were volatile.
"The added complexity
of leveraged and inverse exchange-traded products makes it essential that
brokerage firms have an adequate understanding of the products and sufficiently
trained their sales force before the products are offered to retail customers.
Firms must conduct reasonable due diligence and ensure that their
representatives have an understanding of these products." said Brad
Bennett, FINRA Executive Vice President and Chief of Enforcement.
Recently, ETFs has gained
more prominence in Wall Street and thereby subjected to increased regulatory
Assets in US listed Exchange
Traded Funds (ETF) and Exchange Traded Notes (ETN) rose 12 percent to about
$1.21 trillion at March 2012 month-end, according to ETF Industry Association.
ETF/ETN net cash inflows
reached approximately $13.2 billion for the month of March 2012, with
year-to-date net cash inflows reaching $55.9 billion, a record for the first
quarter of a calendar year.
At March 2012 month-end,
there were 1,446 U.S. listed products, an increase of 23 percent from 1,173
U.S. listed products at the same time last year.