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Four US bank giants fined $9m for leveraged ETF sales
by Emma Dunkley on May 02, 2012 at 11:47
Four US banks have been fined a total of more than $9.1 million (£5.6 million) by the US regulator for selling leveraged and inverse exchange traded funds (ETFs).
Citigroup, Morgan Stanley, UBS and Wells Fargo have been fined by the Financial Industry Regulatory Authority (FINRA) for selling complex ETFs without ‘reasonable supervision’ and for not having ‘a reasonable basis for recommending the securities.’
The firms have been fined around $7.3 million and have to pay a total of $1.8 million in restitution to certain customers who made ‘unsuitable’ purchases of inverse and leveraged ETFs.
Brad Bennett, FINRA chief of enforcement, 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.'
The regulator said from January 2008 to June 2009, these firms did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and also failed to conduct adequate due diligence regarding the risks and features of these ETFs.
Inverse and leveraged ETFs have come under fire due to their structure and the way they deliver returns, which some investors have not been made aware of and have suffered as a result.
Unlike traditional ETFs, which track the index, inverse and leveraged products provide short exposure and aim to double, or treble, the return of the index.
However, the short and leveraged exposure is provided on a daily basis, meaning that over longer periods of time, the returns do not necessarily correlate with the stated objective.
This could leave investors shocked if they are expecting two-times the return of the index over a month, for example, and then receive significantly less than that.
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