NASAA Warns on Risks of Leveraged, Inverse ETFs

With respect to the 86 firms:

• 52% permitted reps to recommend leveraged and/or inverse ETFs to customers;
• 83% of the firms allowing leveraged and/or inverse ETFs in customer accounts confirm they have policies and procedures to address ETFs that are leveraged and/or inverse. However, only 59% address the review of customer suitability, and only 26% generate an exception report for positions held longer than one trading session.

“Broker-dealers should carefully consider whether to permit purchases of leveraged and/or inverse ETFs in retail customer accounts,” said Michael Pieciak, NASAA president and Vermont commissioner of financial regulation, said in releasing the report. “Registered representatives who recommend these products without fully understanding them and without receiving appropriate supervision by their firms pose a great risk to investors.”

Most of the broker-dealers that allow customers to purchase and hold leveraged and/or inverse ETFs confirmed they have procedures for these transactions, the report notes.

When asked about those procedures, however, a lesser number of firms indicated they are addressing and monitoring customer suitability, including holding periods.

“This suggests that there is room for improvement in the development and implementation of leveraged and/or inverse ETF-specific supervisory procedures,” the report concludes.