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
FINRA Will File Enforcement Actions for Improper Sales of ETFs and ETNs Throughout Florida and the United States!
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
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