Articles Posted in Leveraged & Inverse ETFs

symbol_hazard.pngBy now, readers of this blog are hopefully aware that we are very negative on the marketing and sale of leveraged and inverse exchange-traded funds (“ETFs”) to average investors. The New York Times recently published a news piece declaring that ETFs, like those offered by Direxion, were “Public Enemy No. 1.”

Still not convinced? Take a look at the year-to-date results for the worst performing Direxion ETFs through 10/7/2015 according to Morningstar–all of them triple-leveraged funds:

Direxion Daily Nat Gas Rltd Bull 3X ETF (GASL) -84.36%

Thumbnail image for lpl.jpgToday, the Financial Industry Regulatory Authority (“FINRA”) reached a settlement with LPL Financial LLC totaling $11.7 Million over multiple failures in the firm’s supervision of customer transactions involving non-traditional exchange traded funds (“ETFs”), variable annuities, mutual funds and non-traded real estate investment trusts (“REITs”).

As part of the settlement, LPL will be required to pay $1,664,592.04 million in restitution, plus interest, to customers affected by the firm’s failure to supervise the sale of non-traditional ETFs. FINRA has stepped up its enforcement efforts over the sale of non-traditional ETF such as leveraged and inverse ETFs, which are complex and risky investments that we have covered at length in several blog posts. Click here for more information about leveraged and inverse ETFs.

LPL has 120 days to locate and provide proof of payment to all affected customers. According to the settlement, a total of 327 unidentified customer accounts are entitled to receive payments ranging from $1.02 to $83,034.97 per account.

The Alcala Law Firm, a California-based securities law firm, has filed a securities arbitration claim against LPL Financial before the Financial Industry Regulatory Authority (FINRA) involving the sale of risky and unsuitable investments in a managed account causing a customer to suffer significant losses between 2011 and 2013–a period of time when the overall stock market enjoyed positive returns. The customer’s investments included an inverse exchange traded fund (“ETF”), a bear fund that bet against the market and several gold funds.

In related news, on May 6, 2015, LPL was fined $10 Million by FINRA for widespread supervisory violations and ordered to pay $1.7 in restitution to customers who were sold leveraged and inverse ETFs. Click here for related blog post. LPL, headquartered in Boston, has grown from approximately 8,300 registered representative in 2007 to 18,433. However, LPL’s rapid growth has created problems with regulatory authorities who have repeatedly fined the firm for failure to supervise their growing legion of financial advisors. LPL paid disciplinary fines totaling $2.95 million in 2014 and $8 million (plus $2 million in restitution) in 2013 for supervisory lapses.

Related Blog Post:

Thumbnail image for violators.jpgYesterday, Berthel Fisher & Co. Financial Services, Inc. entered into a settlement with the Financial Industry Regulatory Authority (FINRA) and agreed to pay a $775,000 fine stemming from sale of unsuitable investments, including non-traded REITs as well as leveraged and inverse ETFs. According to FINRA’s BrokerCheck system, Berthel Fisher has been the subject of multiple enforcement actions initiated by FINRA and state securities administrators.

Regulators Stepping Up Supervision of Alternative Investments

Berthel Fisher is the latest of several brokerage firms to get swept up in FINRA’s focus on the brokerage industry’s sale of risky alternative investments to financial consumers and the failure to properly enforce suitability standards for those investments. The risks associated with investing in non-traded REITs and leveraged/inverse ETFs have been extensively covered in previous blog posts. For more information, see below:

Two related brokerage firms–Stifel, Nicholas & Company, Incorporated and Century Securities Associates, Inc.–entered into a settlement with the Financial Industry Regulatory Authority (FINRA) over alleged misconduct in the sales of leveraged and inverse exchange traded funds (ETFs). As part of the settlement, Stifel and Century agreed to pay fines totaling $550,000 and to make restitution totaling $474,613 to a select group of 65 customers who were sold ETFs between January 1, 2009 and June 1, 2013. Presumably, the group of customers chosen to receive redemption consists of customers who had selected a conservative investment objective and had held the ETFs for an unreasonable period of time. In its written findings, FINRA provided a brief description of two customers that are entitled to redemption:

  • A Stifel customer with a primary investment objective of “income” who invested in a nontraditional ETF and held if for 18 months that lost $41,000.
  • A Century customer with a primary investment objective of “income” who invested in a nontraditional ETF and held if for 2 ½ years that lost $13,600.

Thumbnail image for Thumbnail image for toxic.jpgEarlier this month, a New York judge dismissed an investor class action lawsuit alleging that ProShares Advisors LLC and SEI Investments Distribution Co failed to fully disclose the risks of investing in leveraged exchange traded funds (“ETFs”) such as the ProShares SRS Fund. In dismissing the action, U.S. District Court Judge John G. Koeltl wrote that ProShares’ sales materials adequately disclosed the risks involved. The court’s ruling shows how tough it can be for aggrieved investors to directly sue fund companies for misleading marketing.

The message for do-it-yourself investors is caveat emptor (buyer beware). However, investors who purchased leveraged or inverse ETFs through a financial advisor may want to consider pursuing a securities arbitration claim. See related blog post: Securities Arbitration vs. Class Actions: Which is More Financially Rewarding? Our securities law firm has helped several investors recover losses from financial advisors that inappropriately recommendeded leveraged and inverse ETFs such as those offered by ProShares and Direxion. Please read the blog postings below for more information.

Related blog posts:

dollar spiral.jpgOne of the students in my securities law class recently wrote a series of blog postings discussing the pitfalls of investing in leveraged and inverse mutual funds and ETFs. To emphasize just how risky and unsuitable these types of investments can be, here is a list of some of the worst performing leveraged and inverse funds:

Year-to-Date (YTD) Returns as of 11/30/2010:

  • ProFunds UltraShort Small-Cap (UCPIX) -42.54%

Thumbnail image for money_trap.jpgAuthor: Joanna LiCalsi (Law Student, Investor Justice Clinic, University of San Francisco School of Law)

So who should invest in leveraged and inverse mutual funds and exchange traded funds (ETFs)? If anyone at all, it might be the highly knowledgeable and experienced day-trader with loads of money to burn. Fund companies such as Direxion and ProShares state on their websites that leveraged ETFs are not suitable investments unless you “understand the risks… [and] consequences” associated with them and are willing to actively manage your portfolio. On the other hand, the companies say they are inappropriate if you “don’t understand” the risks and consequences, or if you’re a long-term investor who doesn’t plan on actively monitoring your portfolio. I would call this kind of advice lacking at best. While they make it clear that these funds inhabit some risk, they’re still salesmen (don’t ever forget it); and the main gist seems to be, “there’s risk involved, but if you understand the risks, then go for it!” Understanding the risk is just the first step. You have to look at your own bigger investment picture to make an informed choice; think about your goals, needs, portfolio composition, and timeline.

I read somewhere that fewer than 1% of all investors should be involved with these risky, controversial funds. If you’re reading this blog, you’re probably a responsible, smart, retail investor with long-term goals and little to no risk tolerance. Basically, you’re in the 99% of all other investors and they’re probably not for you. But if you insist on dipping your toes in the water, as always, please be sure to consult a trusted financial adviser and always make sure you check out (and understand) the prospectus before you invest.

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