The Financial Industry Regulatory Authority (FINRA) announced that it ordered Wells Fargo Advisors, Citigroup Global Markets, Morgan Stanley, and UBS Financial Services to pay more than $9.1 million for failure to supervise and failure to have a reasonable basis for recommending selling leveraged and inverse exchange traded funds. Each of the four firms sold billions of dollars of these leveraged and inverse exchange traded funds.
The payments consist of more than $7.3 million in fines and $1.8 million in restitution to customers who purchased the leveraged and inverse exchange traded funds. The breakdown 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
- UBS - $1.5 million fine and $431,488 in restitution
Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, was quoted as saying: "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."
In addition, FINRA found that the firms' registered representatives made unsuitable recommendations of leveraged and inverse exchange-traded funds to some customers with conservative investment objectives and/or risk profiles, some of whom held them for extended periods during January 2008 through June 2009 when the markets were volatile.
Leveraged and inverse exchange-traded funds have risks not found in traditional exchange traded funds. Those risks flow from the daily reset, leverage and compounding of leveraged and inverse exchange traded funds, which caused them to differ significantly from the performance of the underlying index or benchmark when held for longer periods of time. That was particularly true in the volatile markets that existed during January 2008 through June 2009.
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