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February 01, 2014 at 07:05 AM
The biggest problem with leveraged and inverse ETFs isn’t how they’re sold, but how their labeled. Yet, financial regulators like the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) don’t see it that way.
In its latest victory lap, FINRA announced nearly $1.03 million in fines against two St.Louis-based brokerages related to their marketing of leveraged and inverse ETFs to customers.
FINRA ordered Stifel, Nicolaus & Co. (SF) and Century Securities Associates to pay combined fines of $550,000 and a total of nearly $475,000 in restitution to 65 customers in connection with sales of leveraged and inverse ETFs.
According to the regulatory group, from January 2009 to June 2013, Stifel and Century made “unsuitable recommendations” of non-traditional ETFs to some clients, “because some representatives did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs.”
These clients included those with conservative investment objectives “who bought one or more non-traditional ETFs based on recommendations made by the firms’ representatives, and who held those investments for longer periods of time, experienced net losses,” FINRA says.
Much of the confusion surrounding leveraged and inverse ETFs can be blamed – not on Wall Street’s brokerage community – but directly on regulators. Why?
Poor Labeling?
Regulators have permissively allowed a lack of uniformity in how ETF providers are permitted to label their products. The final result is confusion – and lots of it.
ProShares, for example, uses the word “Ultra” to describe its two-times(2x) daily leveraged ETFs and “UltraShort” to describe its two-times daily inverse ETFs. The “UltraPro” lineup is three-times (3x) daily leveraged ETFs, meaning these ETFs aim for 300% daily magnification to the underlying index.
Meanwhile, other firms with leveraged and inverse ETPs, like Direxion and VelocityShares, label their products very differently.
