The Financial Industry Regulatory Authority (“FINRA”) has fined Citigroup Global Markets, Inc. (“Citigroup”), Morgan Stanley, UBS Financial Services, Inc. (“UBS”) and Wells Fargo Advisors, LLC (“Wells Fargo”) a total of $9.1 million for selling more than $27 billion of complex, non-traditional exchange traded funds (“ETFs”) to investors for whom the exotic ETFs were unsuitable. In addition, FINRA cited the four firms for supervisory failures.
An ETF is a basket of investments such as stocks, bonds, commodities, currencies, options, swaps, futures contracts or other derivative instruments that tracks the performance of an underlying index or sector. Synthetic ETFs, such as leveraged and inverse ETFs, are generally not appropriate for “buy and hold” investors.
Leveraged ETFs use financial derivatives and debt to multiply the returns of an underlying index. Leveraged ETFs aim to keep a constant amount of leverage during the investment period, such as a 2:1 or 3:1 ratio.
Inverse ETFs, also called “short” funds, use various financial derivatives to profit from a decline in the value of an underlying index. Investing in an inverse ETF is similar to holding various short positions in order to profit from falling prices. An inverse ETF that tracks a particular index seeks to deliver the inverse of the performance of that index.
Leveraged inverse ETFs, also called “ultra short” funds, seek to deliver a return that is a multiple of the inverse performance of the underlying index. Because most leveraged and inverse ETFs are designed to achieve their stated objectives on a daily basis, they are not meant to be held for longer periods of time. If held for more than one day, their performance can differ significantly from their stated performance objectives.
FINRA alleges that during the period from January 2008 to June 2009, Citigroup, Morgan Stanley, UBS and Wells Fargo had inadequate supervisory systems in place for monitoring the sales of synthetic ETFs and did not perform adequate due diligence, resulting in a lack of understanding by the firms’ brokers about synthetic ETFs’ risks and features. As such, FINRA claims the four firms did not have a reasonable basis to recommend the investments to their retail clients, and in some instances, the firms recommended the complex synthetic ETFs to risk-averse investors for whom the investments were unsuitable.
Of the $9.1 million total: Wells Fargo was fined $2.1 million and will pay $641,489 in restitution; Citigroup was fined $2 million and will pay $146,431 in restitution; Morgan Stanley was fined $1.75 million and will pay $605,584 in restitution; and UBS was fined $1.5 million and will pay $431,488 in restitution.
The Florida securities lawyers at McCabe Rabin, P.A. represent investors nationwide in FINRA arbitration matters. Investors nationwide who have incurred recoverable investment losses due to specific failures by stockbrokers and brokerage firms, and who may have a FINRA arbitration claim, may contact the Florida securities lawyers at McCabe Rabin, P.A. for a free and confidential consultation by calling toll free at 877.915.4040 or by e-mail to firstname.lastname@example.org.