Author: Joanna LiCalsi (Law Student, Investor Justice Clinic, University of San Francisco School of Law)
In June 2009, the Financial Industry Regulatory Authority (FINRA) responded to the explosion in popularity of leveraged and inverse mutual funds and exchange traded funds (ETFs) and the detrimental losses they’ve caused to many confused investors, by issuing a Regulatory Notice to brokers and firms. The telling notice says that these funds are “typically unsuitable for retail investors,” and then proceeds to remind brokers of their duties and obligations to customers regarding ethical sales practices and recommendation suitability. Generally, a concern over a lack of risk disclosure and mitigation were at the heart of the alert. FINRA even reminds firms that close broker supervision is necessary to ensure that this warning is heeded. Two months later, the SEC and FINRA released a joint Investor Alert (only the second time they’ve done that) about leveraged and inverse ETFs and the confusion pervasive amongst investors. The alert focuses on the high risk and extreme short-term nature of these funds. Essentially, they’re telling investors to avoid them like the plague.
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