The Financial Industry Regulatory Authority, or Finra, has ordered Citigroup Inc. (C), Morgan Stanley (MS), UBS AG (UBS) and Wells Fargo & Co. (WFC) to pay a combined $9.1 million for allegedly improper sales of leveraged and inverse exchange-traded funds.
Wall Street’s self-regulator fined the companies a total of more than $7.3 million and also ordered them to pay $1.8 million in restitution to customers who bought the ETFs.
Finra said the brokerages failed to reasonably supervise sales of these types of ETFs in 2008 and part of 2009, and wrongly steered some clients to them. Leveraged and inverse ETFs are designed for short-term trading, and aren’t for long-term investors.
ETFs trade daily on exchanges like stocks, and the leveraged versions use futures or derivatives to multiply the daily returns of an index, sometimes striving to double or triple the return. Inverse ETFs seek to return the opposite of the index. Over terms longer than a day, the compounding effect can lead to results that vary significantly from the one-day outcome, making them unpredictable and highly risky to hold for longer periods.
Finra said Tuesday that each of the four companies sold billions of dollars of these non-traditional ETFs to customers, and some were held for extended periods when markets were volatile.
FINRA arbitration is a dispute resolution process used in the financial industry to settle disputes between investors, brokerage firms, and registered representatives. Administered by the Financial Industry Regulatory Authority (FINRA), this process offers a faster and less formal alternative to traditional court litigation. Arbitration involves a neutral third-party arbitrator or panel who reviews the evidence and arguments from both sides and makes a binding decision. Unlike court proceedings, arbitration does not involve juries, and the arbitrator’s decision is typically final, with limited grounds for appeal. This method is commonly used for resolving issues such as alleged misconduct, breach of contract, and other disputes related to investment accounts. FINRA arbitration aims to provide a fair and efficient resolution, ensuring that parties can resolve conflicts without the need for prolonged litigation. This process is particularly significant for maintaining trust and integrity in the financial markets.