The Financial Industry Regulatory Authority (“FINRA”) sanctioned Citigroup Global Markets Inc., Morgan Stanley & Co., LLC, UBS Financial Services, and Wells Fargo Advisors, LLC (the “firms”), for improper transactions involving leveraged and inverse exchange-traded funds. FINRA ordered the firms to pay the following: Citigroup, $2 million fine and $146,431.00 in restitution, Morgan Stanley, $1.75 million fine and $604,584 in restitution, UBS, $1.5 million fine and $431,488.00 in restitution, and Wells Fargo, $2.1 million fine and $641,489 in restitution.
According to FINRA, leveraged and inverse ETF’s have particular risks not found in traditional ETF’s. Most of these products “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis. FINRA’s investigation revealed that each firm sold billions of dollars of these non-traditional EFT’s. The firms exposed investors to risks and unpredictability factors inherent in these products, especially when held over a period longer than a day.
FINRA’s investigation found that from January 2008 through June 2009, the firms did not have adequate supervisory systems to monitor the sales of the products and failed to conduct proper due diligence regarding the risks and features of inverse ETF’s. Furthermore, the firms’ registered representatives made unsuitable recommendations of these products to some customers with conservative investment objectives and/or risk profiles. FINRA said, “[t]he 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.”
By accepting the settlement, the firms neither admitted nor denied the charges.