Washington,SEC,FINRA Concerned About ETFs

It is becoming apparent that exchange traded funds (ETFs) continue to arouse the attention of Washington and securities regulators.

Early in the week FINRA levied over $9 million in fines and restitution for the sale of ETFs to retail customers against UBS, Citgroup, Morgan Stanley and Wells Fargo. Here is a prior discussion on that topic. For all of the prior articles on exchange traded funds, see this.

The Securities & Exchange Commission (SEC) began looking at ETFs following the “flash crash” in 2010 when the Dow Jones average plummeted 1000 points in minutes, and then quickly rebounded. Reuters reported in February 2012 that the SEC as well as regulators are concerned about ETFs and a possible connection between high-frequency traders and hedge funds who trade in and out of the investments. This trading has resulted in instances where the ETF trades fail to settle on time.

In November 2011, Senator Jack Reed chaired a hearing by the US Senate Committee on Banking, Housing and Urban Affairs entitled Market Microstructure: Examination of Exchange-Traded Funds. The committee and the SEC are concerned about transparency of ETFs and their affect on market volatility. If you are inclined to do so, here is a link to the archive of the hearing testimony. This week Reed confirmed  the concern his committee continues to have about ETFs and their commitment to continue the investigation:

"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,” Mr. 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.”

The FINRA sanction against UBS,Wells Fargo, Citigroup and Morgan  Stanley this week focused on the fact that these complex investments are being sold by brokers who do not understand what they are selling and they are not suitable for the investors they are being sold to.

Brad Bennett, Finra executive vice president and chief of enforcement, said in a statement:

“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.”

We have spoken to a number of investors who have suffered losses on ETFs who purchased them on the advice of their broker who did not adequately explain the nature of the investment nor the risks associated with it. If you purchased exchange traded funds or exchange traded notes and have suffered losses, you may be able to recover some or all of the losses.

Contact us at 561 391 1900. We have been helping investors recover stock market losses for over 20 years.

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Rex Securities Law