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Home > Blog > FINRA Issues Fines Over Risky ETFs

FINRA Issues Fines Over Risky ETFs

Several of the nation’s leading banks – including Citigroup, Morgan Stanley, UBS and Wells Fargo – were recently sanctioned by the Financial Industry Regulatory Authority (FINRA) for more than $9.1 million over their failure to supervise retail sales of leveraged and inverse exchange-traded funds (ETFs). In addition to supervisory failures, FINRA said the banks failed to have “a reasonable basis” for recommending the products to investors in the first place.

“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,” said J. Bradley Bennett, FINRA enforcement chief, in a statement.

“Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products,” he added.

 The break-down of the fines is as follows: 

  • Wells Fargo – $2.1 million fine and $641,489 in restitution;
  • Citigroup – $2 million fine and $146,431 in restitution;
  • Morgan Stanley – $1.75 million fine and $604,584 in restitution; and
  • UBS – $1.5 million fine and $431,488 in restitution.

Both the Securities and Exchange Commission (SEC), the North American Securities Administrators Association and FINRA have issued separate and joint warnings to investors about leveraged and inverse exchange-traded funds in recent months. Specifically, regulators are concerned about the increasing complexity of the products, their lack of transparency and their potential to cause significant financial losses to investors who do not thoroughly understand how inverse and leveraged funds actually work.

Leveraged ETFs seek to deliver “multiples” of the performance of the index or benchmark they track. Inverse ETFs do the reverse. They try to deliver the opposite of the performance of the index or benchmark being tracked.

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