Sale of Exchange Traded Funds (ETFs) has cost major Wall Street
firms millions in fines. The firms -
Wells Fargo & Company
) - have been penalized by the Financial Industry Regulatory
Authority (FINRA) over the sale of leveraged and inverse
They must pay a total of $9.1 million, of which $7.3 million is
the penalty amount, and the remaining $1.8 million will be
reimbursed to the customers who bought the ETFs.
According to FINRA, the brokerage units of these firms -
Citigroup Global Markets Inc, Morgan Stanley & Co. LLC, UBS
Financial Services and Wells Fargo Advisors LLC - have been accused
of selling the leveraged and inverse exchange-traded funds in an
improper fashion between 2008 and 2009. FINRA claimed that these
firms lacked a sufficient supervision mechanism for this variety of
Sufficient due diligence were not performed on the risks and
characteristics of the ETFs. Therefore, there was no reasonable
basis to advise the ETFs to retail customers. Moreover, it was
found that some of the customers with a conservative risk appetite
and investment targets were recommended this type of ETFs by the
The charges were neither admitted nor denied by the firms. They
consented to the FINRA findings.
Leveraged and Inverse ETFs
ETFs are a type of security that trades on stock exchanges like
stocks. They mostly track an index or benchmark and hold assets
such as stocks, commodities, or bonds. Leveraged ETFs particularly
make use of the financial derivatives and debt to magnify the
returns of an index or the benchmark, while Inverse ETFs seek to
return the opposite of the index or benchmark they track.
Notably, complexity and added risks are present in leveraged and
inverse ETFs which make them unsuitable for holding them long. As a
result of risks related to daily reset, leverage and compounding,
if these instruments are held for long periods and specifically in
volatile markets, then their performances substantially vary from
the underlying index or benchmark performance. It was found that
the customers held leveraged and inverse ETFs at such times.
Penalties in Detail
Among the four firms, Wells Fargo's penalty is the highest. The
company needs to pay a $2.1 million fine and $641,489 in
restitution. Next is Citigroup, which needs to pay a $2 million
fine and $146,431 in reimbursement. Morgan Stanley has to pay a
$1.75 million fine and $604,584 in restitution while UBS will pay
$1.5 million as fine and $431,488 as reimbursement.
Post financial crisis, financial firms have witnessed increased
scrutiny by regulators, and penalization for misguiding investors
either through suppression of information regarding the risky
profile of the instruments sold or though any other fraudulent
activities. We believe that such efforts on part of the regulators
are in the best interest of the investors.
As a matter of fact, FINRA had warned about the sale of these
instruments earlier and the firms have accordingly implemented
policies, procedures and training for better supervision and to
satisfy regulatory requirements. We believe such efforts will
instill investors' confidence in the market for such
CITIGROUP INC (C): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
UBS AG (UBS): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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