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TAG | Leveraged ETFs

Feb/13

14

FINRA Fines Broker $1.8mill in Sale of ETFs

Comments off · Posted by Securities Lawyer in FINRA

Nicholas Rowe and his firm, Focus Capital Wealth Management, Inc. of Bedford, New Hampshire, were found liable in a case alleging negligence, civil fraud, and other misdeeds, involving the sale of risky ETFs (Exchange Traded Funds) to nine investors, according to a ruling by a Financial Industry Regulatory Authority (FINRA) arbitration panel. Some of these investors were in their fifties and sixties, including two widows. Rowe was ordered to pay $1.8 million to the investors.

The Reuters article goes on to explain that leveraged and inverse ETFs were designed to amplify short-term returns by using debt and derivatives and are considered more suitable for professional traders than for long-term investors or anyone does not want a high-risk portfolio. In 2009, FINRA and other regulators began issuing warnings about the sale of leveraged and inverse ETFs because they worried that brokers were selling them to buy-and-hold investors – a strategy likely to cause heavy losses.

The Reuters article says that FINRA arbitration may be the last hope for some investors whose advisers guided them to leveraged and inverse ETFs and then mismanaged the investments.

Investors in the Rowe case were all heavily concentrated in leveraged and inverse ETFs. That strategy is nearly guaranteed to lead to losses, since the investments effectively require betting on whether the market is going up or down.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, PLLC, represents clients nationwide. If you invested with Nicholas Rowe or Focus Capital Wealth Management, Inc., or had losses in other leveraged and inverse ETFs, call: 888-760-6552, or you may visit our website and complete the online form at: http://www.securitieslawyer.com.

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Jan/13

23

FINRA to Focus on BDCs and Leveraged ETFs in 2013

Comments off · Posted by Securities Lawyer in FINRA

The Financial Industry Regulatory Authority Inc. (FINRA) released its 2013 regulatory and examination priorities letter. The annual letter alerts the broker-dealer community to what Finra examiners will be looking for in the coming year. FINRA will continue to watch yield-oriented products this year but FINRA also will be focusing on business development companies (BDCs), exchange-traded funds (ETFs) and products that use leverage and the use of automated investment advice writes Dan Jamieson in an article for InvestmentNews.com.

FINRA is “particularly concerned about sales practice abuses, yield-chasing behaviors and the potential impact of any market correction, external stress event or market dislocation on market prices,” FINRA said in the letter.

With reference to BDCs, FINRA warned that they have “significant market, credit and liquidity risks” and risk over-leveraging illiquid portfolios with low-cost financing. Leveraged loans are relatively illiquid and hard to value, while CMBS and high-yield often carry higher risks than normal, given their historically low yields, Finra said. High distribution rates on closed-end funds attract investors who may not understand that some of these funds are returning capital, the letter warned.

FINRA’s notice also expressed concern about a “proliferation” of ETFs and ETNs that use leverage or track volatility measures, emerging markets and currencies.

For the first time this year, FINRA examiners will be looking at the use of automated investment advice.

Just because FINRA doesn’t include something in a current letter doesn’t mean examiners won’t be looking into it.

Securities Lawyer, Lars K. Soreide, of Soreide Law Group, who represents clients nationwide before FINRA. For a free consultation with an attorney on how to potentially recover your losses, call 888-760-6552, or visit our website at: http://www.securitieslawyer.com.

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May/12

7

ETFs Need Closer Attention, Says Senator Reed

Comments off · Posted by Securities Lawyer in FINRA

This past Tuesday, May 1st., FINRA, the Financial Industry Regulatory Authority, Inc. fined four major brokerages $9.1 million for selling complex ETFs (Exchange Traded Funds) to investors whose portfolios were otherwise conservative. 

Without admitting or denying the charges, the brokerges will be paying $7.3 million in fines, and $1.8 million in restitution to the clients who bought inverse and leveraged ETFs.  Those brokerages are:  Citigroup Global Markets Inc, Morgan Stanley & Co., LLC, Wells Fargo Advisors, LLC, and UBS Financial Services.

The chairman of the Senate Banking Subcommitte on Securities, Insurance, and Investment, Sen. Jack Reed, D-RI, announced that he will follow up on the hearing he held last October on ETFs with another hearing in the next few weeks.

“My hearing last fall shined a light on these products, which may be affecting market structure, volatility and price discovery and has the potential to harm investors,” Sen. Reed said. “I think this market deserves more attention from both domestic and foreign regulators, and I plan to hold another hearing on ETFs and related issues in the near future.”

Finra felt he brokerages it disciplined had failed to educate their reps about the complexities – and dangers – of leveraged and inverse ETFs, which hold derivatives and magnify market movements. The brokers then sold them to uninformed investors.

“The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficientily train their sales force before the products are offered to retail customers,” Brad Bennett, Finra executive vice president and chief of enforcement, said in a statement. “Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

Soreide Law Group warned investors through our blog and marketing materials as early as 2009 against buying and holding leveraged ETFs, and we have been filing lawsuits related to sales practices surrounding leveraged ETFs against brokerage firms nationwide since then.
 
If you or a loved one invested in a leveraged ETF that was held as a long position at the advice of your broker call (888)760-6552 or visit http://www.securitieslawyer.com.

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May/12

2

DID YOU INVEST IN THESE LEVERAGED ETFs?

Comments off · Posted by Securities Lawyer in FINRA

Soreide Law Group is filing FINRA Arbitrations on behalf of investors who invested in Direxion 3x Funds: FAZ, ERY, BGZ, and TZA. 

Leveraged ETF’s have now imploded and regulators and investors have finally woken up and are beginning to pay attention. Major fines have just been handed down to the industries top brokerage houses for sales practices relating to leveraged ETFs.
 
These funds seek 3 times the performance or benchmark of the fund or index they are tracking. They are highly leveraged and were designed for a day trade (not buy and hold). Many brokers misunderstood the makeup of these leveraged exchange traded funds or ETFs and held them as long positions. Over time due to the derivative nature of these products, many of these named ETFs began to cannibalized themselves and not perform as promised.
 
If your stock broker sold you leveraged ETFs such as FAZ, ERY, BGZ or TZA from Direxion and held them for more than several days which resulted in losses, you may be able to recoup those losses through the FINRA arbitration process.
 
FINRA released a Regulatory Notice 09-31 which specifically outlined brokerage firms sales practice obligations relating to leveraged and inverse exchange-traded funds. In FINRA notice 09-31 states, “Most leveraged and inverse ETFs ‘reset’ daily, meaning that they are designed to achieve their stated objectives on a daily basis. Due to the effect of compounding, their performance over longer periods of time can differ significantly from the performance (or inverse of the performance) of their underlying index or benchmark during the same period of time.” Many brokers failed to heed this warning and were negligent in their recommendations to hold these positions for the long term.
 
Several firms were recently fined $9 million by FINRA for selling risky ETFs as a buy and hold strategy to their unsuspecting investors. These firms include household names such as Wells Fargo, UBS, Citigroup, Morgan Stanley. Soreide Law Group is also investigating similar sales practices by smaller brokerage firms that may have made the same negligent recommendations including J.P. Turner & Co., National Securities Corporation, Rockwell Global Capital, K.C. Ward Financial, Merrill Lynch, Newbridge Securities Corporation, Obsidian Financial, and Legend Securities.
 
Soreide Law Group warned investors through our blog and marketing materials as early as 2009 against buying and holding leveraged ETFs, and we have been filing lawsuits related to sales practices surrounding leveraged ETFs against brokerage firms nationwide since then.
 
If you or a loved one invested in a leveraged ETF that was held as a long position at the advice of your broker call (888)760-6552 or visit http://www.securitieslawyer.com.

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Jan/12

22

Complex Investment Products to See More Scrutiny by Finra

Comments off · Posted by Securities Lawyer in FINRA

In an InvestementNews.com article from January20,2012, Dan Jamieson writes that in a regulatory notice, Finra outlined characteristics of what it calls “complex products,” which could include structured notes, inverse or leveraged exchange-traded funds, hedge funds and securitized products such as asset-backed securities.

Finra stated that brokerage firms should have formal written procedures covering everything from the initial due diligence to post-sale performance. This notice specifically identifies duties that fall to individual brokers in understanding complicated products and explaining them to customers. The notice also said that registered representatives should consider whether less complex and cheaper products might achieve the same objectives.

“Finra is letting it be known that recommendations of complex products will be given even more scrutiny going forward,” said Mary Harris-King, co-founder of Comprehensive Securities Compliance Solutions Inc.

Jamieson writes that in its notice, Finra reviewed what a number of European regulators had done in characterizing various complex products. The notice also said that registered representatives should consider unbundling structured products.

“Registered representatives should compare a structured product with embedded options to the same strategy through multiple financial instruments on the open market, even with any possible advantages of purchasing a single product,” Finra said in the notice.

This was good news to Robert Gordon, chief executive at Twenty-First Securities Corp., which replicates structured notes by buying underlying instruments like zero-coupon Treasuries and options on ETFs.

“It looks like Finra is saying that brokers can’t say this [structured note] is simpler — that’s not a good excuse” to buy it, he said.

The InvestmentNews.com article goes on to say that buying the components of a note that guarantees principal is 2% to 3% cheaper than buying the package, offers tax advantages, and lessens counterparty risk, Mr. Gordon said.

If you or a family member have sustained losses in  your investments due to your stock broker or financial advisor’s recommendation, call 888-760-6552, or visit www.securitieslawyer.com.
 
Soreide Law Group, PLLC., representing investors nationwide before FINRA the Financial Industry Regulatory Authority.
 

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Oct/11

6

Did You Suffer Losses In Leveraged ETFS And Inverse ETFS–Particularly in 2008-2009?

Comments off · Posted by Securities Lawyer in FINRA

Recently warnings from the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) siting the dangers of leverged ETFs and inverse ETFs (exchange-traded funds). These funds are extremely complex products that carry a great deal of risk. Soreide Law Group, PLLC, has launched an investigation into these funds.

It is noted that ETFs are investments that track an underlying benchmark or index, similar to a traditional mutual fund. Unlike mutual funds, non-traditional ETFs trade throughout the day on securities exchanges like stocks. Over the last several years, ETFs have become more common, but also more complicated. So rather than track underlying benchmarks, some non-traditional ETFs have been designed to multiply or return the opposite of a given benchmark.

Leveraged ETFs use futures or derivatives to multiply the daily return of a given index, such as the S&P 500. Some ETFs try to double or even triple the daily return. Leveraged ETFs are frequently marketed with the term “Ultra” or “2X” in their ETF trade name. Inverse ETFs seek to return the opposite of a given index, or double or triple the opposite of an index. Inverse ETFs are marketed as a way to hedge an investment strategy and they frequently carry the term “Short” or “Ultra Short” in their ETF trade names.

Recently, the SEC and FINRA warned investors that leverged ETFs and inverse ETFs are not designed to be held for long periods of time, and FINRA has warned that inverse ETFs and leveraged ETFs may not be suitable for retail investors who plan to hold them for more than one trading session, particularly in volatile markets.

These leveraged and inverse ETFs suffered losses following the market volatility of 2008 and 2009. The following list are those ETFs commonly sold ETFs during this time:

ProShares Ultra Short Real Estate Fund (SRS)
ProShares UltraShort Dow 30 ETF (DXD)
ProShares UltraShort Financials ETF (SKF)
ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP)
ProShares UltraShort Gold ETF (GLL)
ProShares UltraShort DJ-AIG Crude Oil ETF (SCO)
ProShares UltraShort Oil & Gas ETF (DUG)
ProShares UltraShort MSCI Emerging Markets ETF (EEV)
ProShares Ultra Financials ETF (UYG)

Your stockbroker/dealer may have misrepresented the risks involved with these ETFs, failed to fully explain the risks and how ETFs work, or recommended ETFs to someone the investment was not suitable.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have experienced a loss through the sale of ETFs, particularly in 2008 and 2009, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.  

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority

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Jul/11

21

Massachusetts is Suing RBC Capital, and Former Representative over Leveraged ETF Sale

Comments off · Posted by Securities Lawyer in FINRA

In a June 20, 2011, article from Bloomberg News, it was reported that Massachusetts’ top securities regulator is suing RBC Capital Markets LLC and one of its former registered representatives over the sale of leveraged exchange-traded funds, saying they sold them to clients who didn’t understand how the investments worked.

The Massachusetts Secretary of the Commonwealth, William F. Galvin, said RBC Capital and Michael Zukowski, a former agent, used “dishonest practices” in selling the funds, according to a statement e-mailed today. Galvin is seeking restitution to Massachusetts investors, a cease and desist order, and an administrative fine.

“The point of the complaint is not that the investors lost money,” Galvin said in the statement. “The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”

The Bloomberg article adds Galvin said that Zukowski, who worked in the firm’s Osterville office, sold clients “non-traditional” leveraged and inverse ETFs. Leveraged ETFs use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark. The Financial Industry Regulatory Authority warned investors and fund sellers in June 2009 that such ETFs might not be a good fit for long-term investors. Galvin opened a probe into the products in July 2009.

It was noted that RBC Capital is a subsidiary of Toronto-based Royal Bank of Canada.

Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member feel you have become a victim of the sale of non-traditional ETFs by broker Michael Zukowski or RBC Capital Markets, LLC, of Massachusetts, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses.  To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.  

Soreide Law Group, PLLC., representing investors nationwide before FINRA  the Financial Industry Regulatory Authority.

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