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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.

In its first actions against firms that put clients in these products, FINRA said the four wirehouses experienced supervisory failures and lacked a “reasonable basis” for recommending the securities to certain clients. Together, the firms bought and sold $27 billion of the nontraditional ETFs from January 2008 through June 2009, FINRA said.

The firms agreed to pay the fines of $7.3 million and restitution of $1.8 million without admitting or denying the allegations.

These sanctions are likely only the beginning as it is now clear that ETFs and ETNs are a significant problem for the brokerage industry.

In March 2010, the SEC stopped approving applications for ETFs that use derivatives and indicated that it wants to review whether additional investor protections are warranted, particularly for leveraged and inverse ETFs.

FINRA and the SEC’s involvement in these products is a result of the leverage and risks associated with these investments and the concern that such investments can be confused with less risky and more traditional ETFs.

The more exotic ETFs are riskier because they reset daily and use leverage and compounding. Results of leveraged and inverse ETFs can differ significantly from the performance of the underlying index, especially when held for long periods of time and during volatile markets.

FINRA and the SEC published a joint investor alert in 2009 warning that leveraged and inverse ETFs are complicated investments that focus on meeting daily performance goals. The agencies said long-term performance is likely to be very different than the investment’s stated daily objectives, and recommended that investors discuss the products with an investment professional.

The following is a list of some of the ETFs and ETNs currently available:

BGZ – Direxion Daily Large Cap Bear 3X Shares ETF

BIS – UltraShort NASDAQ Biotechnology ETF

BRIS – Direxion Daily BRIC Bear 3x Shares ETF

BXDB – Barclays Short B Leveraged Inverse S&P 500 Total Return ETN

COWS – Direxion Daily Agribusiness Bear 3x Shares ETF

DDG – Short Oil & Gas ProShares ETF

DGLD – 3x Inverse Gold ETN

DLBS – iPath US Treasury Long Bond Bear ETN

DMM – MacroShares Housing Down ETF

DNO – United States Short Oil ETF

DOG – Short Dow30 ProShares ETF

DOY – MacroShares $100 Oil Down ETF

DPK – Direxion Daily Devloped Markets Bear 3X Shares ETF

DSLV – 3x Inverse Silver ETN

DSTJ – JP Morgan 2X Short US Long Treasury Futures ETN

DSXJ – JP Morgan 2X Short US 10 Year Treasury Futures ETN

DUG – UltraShort Oil & Gas ProShares ETF

DUST – Direxion Daily Gold Miners Bear 3x Shares ETF

DXD – UltraShort Dow 30 ProShares ETF

EDZ – Direxion Daily Emerging Markets Bear 3X Shares ETF

EEV – UltraShort MSCI Emerging Markets ProShares ETF

EFU – UltraShort MSCI EAFE ProShares ETF

EFZ – Short MSCI EAFE ProShares ETF

ERY – Direxion Daily Energy Bear 3X Shares ETF

EUM – Short MSCI Emerging Markets ProShares ETF

EUO – ProShares UltraShort Euro ETF

EWV – UltraShort MSCI Japan ProShares ETF

FAZ – Direxion Daily Financial Bear 3X Shares ETF

FXP – UltraShort FTSE/Xinhua China25 Proshares ETF

GASX – Direxion Daily Natural Gas Related Bear 3X Shares ETF

GLL – UltraShort Gold ProShares ETF

INDZ – Direxion Daily India Bear 3x Shares ETF

IPAL – 2x Inverse Palladium ETN

IPLT – 2x Inverse Platinum ETN

KRS – Short KBW Regional Banking ETF

KOLD – UltraShort DJ-UBS Natural Gas ETF

LHB – Direxion Daily Latin America 3x Bear Shares ETF

MATS – Direxion Daily Basic Materials Bear 3X Shares ETF

MWN – Direxion Daily Mid Cap Bear 3X Shares ETF

MYY – Short MidCap400 ProShares ETF

MZZ – UltraShort MidCap400 ProShares ETF

PSQ – Short QQQ ProShares ETF

PST – ProShares UltraShort 7-10 Year Treasury ETF

QID – UltraShort QQQ ProShares ETF

QLD – Ultra QQQ ProShares ETF

REK – ProShares Short Real Estate ETF

RETS – Direxion Daily Retail Bear 3X Shares ETF

REW – UltraShort Technology ProShares ETF

RINF – ProShares 30 Year TIPS/TSY Spread ETF

RSW – Rydex Inverse 2x S&P 500 ETF

RUSS – Direxion Daily Russia Bear 3x Shares ETF

RWM – Short Russell2000 ProShares ETF

RXD – UltraShort Health Care ProShares ETF

SAGG – Daily Total Bond Market Bear 1x Shares ETF

SBB – ProShares Short S&P SmallCap600 ETF

SBM – ProShares Short Basic Materials ETF

SCC – ProShares UltraShort Consumer Services ETF

SCO – ProShares UltraShort DJ-AIG Crude Oil ETF

SDD – ProShares UltraShort SmallCap600 ETF

SDK – ProShares UltraShort MidCap Growth ETF

SDOW – UltraPro Short Dow 30 ETF

SDP – ProShares UltraShort Utilities ETF

SDS – ProShares UltraShort S&P500 ETF

SEF – Short Financials ProShares ETF

SFK – ProShares UltraShort Russell1000 Growth ETF

SH – ProShares Short S&P500 ETF

SICK – Direxion Daily Healthcare Bear 3X Shares ETF

SIJ – ProShares UltraShort Industrials ETF

SJB – ProShares Short High Yield ETF

SJH – UltraShort Russell2000 Value ProShares ETF

SJL – ProShares UltraShort MidCap Value ETF

SFK – UltraShort Russell1000 Growth ProShares ETF

SKK – UltraShort Russell 2000 Growth ProShares ETF

SMDD – UltraPro Short Mid-Cap 400 ETF

SMN – ProShares UltraShort Basic Materials ETF

SOXS – Direxion Daily Semiconductor Bear 3x Shares ETF

SPXU – ProShares Ultra Pro Short S&P 500 ETF

SQQQ – UltraPro Short QQQ ETF

SRS – ProShares UltraShort Real Estate ETF

SRTY – UltraPro Short Russell 2000 ETF

SSG – ProShares UltraShort SemiConductor ETF

SVXY – ProShares Short VIX Short-Term Futures ETF

SZK – ProShares UltraShort Consumer Goods ETF

TBF – ProShares Short 20+ Year Treasury ETF

TBT – ProShares UltraShort 20+ Year Treasury ETF

TBX – Short 7-10 Year Treasury ETF

TBZ – UltraShort 3-7 Year Treasury ETF

TLL – ProShares UltraShort Telecommunications ETF

TMV – Direxion Daily 30-year Treasury Bear 3x Shares ETF

TOTS – Direxion Daily Total Market Bear 1X Shares ETF

TPS – ProShares UltraShort TIPS ETF

TTT – UltraPro Short 20+ Year Treasury ETF

TWM – UltraShort Russell 2000 ProShares ETF

TYBS – Daily 20 Year Plus Treasury Bear 1x Shares ETF

TYNS – Daily 7-10 Year Treasury Bear 1x Shares ETF

TYO – Direxion Daily 10-year Treasury Bear 3x Shares ETF

TYP – Direxion Daily Technology Bear 3x Shares ETF

TZA – Direxion Daily SmallCap Bear 3x Shares ETF

TWQ – ProShares UltraShort Russell 3000 Index ETF

UDN – PowerShares US Dollar Bearish ETF

YCS – ProShares UltraShort Yen ETF

YXI – Proshares Short FTSE / Xinhua China 25 ETF

ZSL – ProShares UltraShort Silver ETF

AGA – PowerShares DB Agriculture Double Short ETN

BOM – PowerShares DB Base Metals Double Short ETN

DDP – PowerShares DB Commodity Short ETN

DEE – PowerShares DB Commodity Double Short ETN

DGZ – PowerShares DB Gold Short ETN

DRR – Market Vectors Double Short Euro ETN

DTO – PowerShares DB Crude Oil Double Short ETN

DTUS – iPath US Treasury 2-year Bear ETN

DTYS – iPath US Treasury 10-year Bear ETN

DZZ – PowerShares DB Gold Double Short ETN

EMSA – iPath Short Enhanced MSCI Emerging Markets Index ETN

IVOP – iPath Inverse S&P 500 VIX Short-Term Futures ETN

JGBS – PowerShares DB Inverse Japanese Government Bond Futures ETN

JGBD – PowerShares DB 3x Inverse Japanese Government Bond Futures ETN

MFSA – iPath Short Enhanced MSCI EAFE Index ETN

MLPS – UBS E-TRACS 1x Monthly Short Alerian MLP Infrastructure Total Return Index ETN

ROSA – iPath Short Extended Russell 1000 TR Index ETN

RTSA – iPath Short Extended Russell 2000 TR Index ETN

SBND – PowerShares DB 3X Short 25+ Year Treasury Bond Exchange Traded Note

SFSA – iPath Short Extended S&P 500 TR Index ETN

SZO – PowerShares DB Crude Oil Short ETN

UDNT – PowerShares DB 3x Short US Dollar Index Futures ETN

XXV – Barclays ETN+ Inverse S&P 500 VIX Short-Term Futures ETN

XIV – VelocityShares Daily Inverse VIX Short Term ETN

ZIV – VelocityShares Daily Inverse VIX Mid Term ETN

Each of these investments are examples of some of the high-risk inverse ETFs and ETNs which are not suitable for unsophisticated, long-term investors.

The most important of investors’ rights is the right to be informed!  This Investors’ Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida.  For over 40 years, Mr. Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues.  Our law firm is devoted to protecting investors’ rights throughout the United States and internationally!  Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

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Robert Wayne Pearce

Robert Wayne Pearce of The Law Offices of Robert Wayne Pearce, P.A. has been a trial attorney for more than 40 years and has helped recover over $125 million dollars for his clients. During that time, he developed a well-respected and highly accomplished legal career representing investors and brokers in disputes with one another and the government and industry regulators. To speak with Attorney Pearce, call (800) 732-2889 or Contact Us online for a FREE INITIAL CONSULTATION with Attorney Pearce about your case.

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