Leveraged ETFs land firms with a $9.1m total fine
Firms must ensure that their “representatives have an understanding of these products”, says US regulator.
A US regulator has fined Citigroup Global Markets, Morgan Stanley, UBS and Wells Fargo Advisors a combined total of more than $9.1m (£5.6m) over the sale of exchange-traded funds.
In addition, the firms have been told to pay $1.8m (£1.11m) in restitution to certain investors who made unsuitable leveraged and inverse ETF purchases.
According to a statement from the Financial Industry Regulatory Authority, Wells Fargo received a $2.1m (£1.29m) fine and will pay $641,489 (£396,536) in redress. Citigroup got a $2m (£1.23m) fine and will pay $146,431 (£90,526) in restitution; Morgan Stanley was fined $1.75m (£1.08m) and will pay $604,584 (£373,756) in restitution, while UBS was fined $1.5m (£0.92m) and will pay $431,488 (£266,708) in redress.
Brad Bennett, chief of enforcement for Finra, said: “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 train 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.”
Finra found that between January 2008 and 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 regarding the risks and features of the ETFs.
The regulatory body claimed that the firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles.
In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of Finra’s findings.
Synthetic ETFs have been under the spotlight in the US and the UK. During 2011, the FSA, the Bank of England and the Financial Stability Board all put out reports warning about the prevalence of and appropriateness of synthetic ETFs, which use derivatives to replicate indices or price movements.
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