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Articles Posted in ETNs

While the popularity of exchange traded notes (“ETNs”) has surged, ETNs can be extremely volatile, and investors run the risk of losing their entire investment. ETNs reportedly hold $17.4 billion in assets, up from under $5 billion five years ago.

Exchange traded notes issued by Credit Suisse have recently traded at prices that were far above and below the true value of the ETN (See “2 ETNs’ manic swings point out peril of use,” by Jason Kephart, InvestmentNews). The true value of an exchange traded note (or any fund) is the net value of the tracked (or held) index or other asset. But when an asset gets hot, like ETNs, it can get overbought, and when something happens to dry up demand, it can get oversold. All of this can happen fast enough to make your head spin. Continue Reading

The Financial Industry Regulatory Authority (FINRA) announced plans to file enforcement actions against certain brokerages in connection with unsuitable sales of leveraged and inverse leveraged exchange-traded funds (ETFs), as well as for failure to train their brokers who sell them (see Reuters article by Suzanne Barlyn and Jessica Toonkel entitled “FINRA to bring cases over leveraged, inverse ETFs”). The article cites former FINRA Enforcement Chief Bradley Bennett as the source of this information, and notes that he refused to identify the broker-dealers that FINRA plans to sue.

Bennett reportedly told lawyers at a Practising Law Institute (PLI) seminar in New York that the enforcement actions will “make statements” about how broker-dealers should ensure that registered representatives are properly trained about these complex products and the types of customers for whom they may or may not be suitable. Continue Reading

The SEC and FINRA are finally stepping up to regulate nontraditional ETFs and ETNs and to ensure that these complicated products are not sold to unsophisticated investors.

Citigroup Global Markets Inc., Morgan Stanley, UBS Financial Services Inc. and Wells Fargo agreed to pay $9.1 million to settle allegations that they sold leveraged and inverse exchange-traded funds to clients who had no business investing in the complex instruments. Continue Reading

Investor advocates are saying that more should be done to protect retail investors in Exchange-Traded Notes (ETNs). There is growing concern that with the rising popularity of ETNs, investors and financial advisers are getting into these products without fully understanding them or the risks involved.

ETN’s are bank-issued debt securities. They were first brought to market six years ago to allow sophisticated investors to place bets on different parts of the market. Recently, however, retail investors have also started trading ETNs to gain access to certain market segments, such as those involving gold, silver, or natural gas. ETN offerings have grown in number over the past few years, with 212 ETNs now found on exchanges. Continue Reading

The Financial Industry Regulatory Authority (FINRA), the self-regulatory arm of the U.S. securities brokerage industry, has issued an Investor Alert regarding the features and risks of exchange-traded notes.  FINRA and the Securities and Exchange Commission have raised concerns about disclosures and sales practices involving exchange-traded notes, as well as other complex structured products. Former FINRA Enforcement Chief Brad Bennett said that FINRA will bring enforcement actions against firms for unsuitable recommendations of exchange-traded notes.

FINRA issued Regulatory Notice 12-03 to provide broker-dealers with guidance on supervising the sale of complex products that are difficult for retail investors and brokers to understand.  The FINRA alert warns that exchange-traded notes often have little or no performance history, their indexes and investment strategies can be quite complex, their returns can be volatile, and the price computed by the issuer can vary significantly from the price in the secondary market.  Firms are required to ensure that their marketing materials are fair and include accurate disclosures of all material risks; that registered representatives are properly trained to understand the risks of exchange-traded notes; and that supervisors are able to determine whether or not the sales meet suitability requirements. Continue Reading

The Financial Industry Regulatory Authority (FINRA) has recently raised concerns about disclosure and sales practices involving Exchange Traded Notes (ETNs).  Of primary concern is the number of clients not suited for the risks associated with ETNs, but who still were recommended ETNs by their brokers.  As a result, FINRA has issued a regulatory notice to provide broker-dealers with guidance on how to oversee the sale of complex products such as ETNs that are difficult for retail investors and brokers to understand.   Firms are now required to make sure that their marketing materials fairly disclose risks, and that supervisors and registered representatives are trained to understand the risks associated with ETNs.  FINRA also warned that ETNs have little or no performance history, their investment indexes and investment strategies are complex, their returns have the potential to be volatile, and the price given by the issuer can vary significantly from the price on the secondary market. Continue Reading

An ETN investor is lender to the issuer of the note, which promises to repay the investor’s principal with interest that is supposedly gauged to the riskiness of the loan. But the issuer’s payment obligation is unsecured, and if the issuer defaults, as Lehman Brothers did, the investor can lose his or her entire investment.

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The Law Offices of Robert Wayne Pearce, P.A. is currently investigating and representing investors against UBS Financial Services, Inc. and other FINRA-registered brokerage firms and financial advisors who offered and sold UBS ETRAC Exchange Traded Notes (ETNs). If you were unaware of the risks of these investments when you bought them, you certainly know now, unfortunately, because you have probably lost most if not all of the money you invested. The fact is your stockbroker or financial advisor had a duty to explain the nature, mechanics, and all of the risks associated with UBS ETRAC Exchange Traded Notes before you were sold the investment.  Further, your stockbroker had a duty to make sure the investments were suitable before they were recommended in light of your risk tolerance, financial objectives, and financial condition. Unfortunately, many stockbrokers and financial advisors who didn’t understand the nature or risks involved sold these investments to investors with conservative and moderate risk tolerance who were simply seeking to enhance their income for retirement. These ETNs were unsuitable investments for investors with that kind of profile. The UBS ETRAC Exchange Traded Notes, particularly the ETNs with a 2X in the name were leveraged 2:1, were very high-risk, speculative investments. Continue Reading

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