ETF Category Archives — Investor Lawyers Blog Published by New York, New York Investor Attorneys

Published on: March 2, 2018

Western International Securities, Inc. Consents to a Fine of $521,098 in Connection With Sales of Non-Traditional ETFs

financial charts and stockbroker On February 28, 2018, FINRA Enforcement entered into a settlement via Acceptance, Waiver and Consent (“AWC”) with Respondent Western International Securities, Inc. (“WIS”) (CRD# 39262). Specifically, without admitting or denying any wrongdoing — WIS consented to paying a fine of $521,908, in addition to restitution to certain investors in the amount of $125,000 — in connection with FINRA’s findings of fact that from January 2011 – November 2015, WIS allegedly failed to supervise its registered representatives with regard to sales of certain leveraged, inverse, and inverse-leveraged Exchange-Traded Funds (“Non-Traditional ETFs”).

As our firm has highlighted in a number of recent blog posts, Non-Traditional ETFs are extremely complicated and risky financial products. Non-Traditional ETFs are designed to return a multiple of an underlying benchmark or index (or both) over the course of one trading session (typically, a single day). Therefore, because of their design, Non-Traditional ETFs are not intended to be held for more than a single trading session, as enunciated by FINRA Enforcement in its recent AWC as concerns Respondent WIS:

“[t]he performance of Non-Traditional ETFs over periods of time longer than a single trading session ‘can differ significantly from the performance… of their underlying index or benchmark during the same period of time.” FINRA Regulatory Notice 09-31.

Published on: February 27, 2018

FINRA Warned of Risks of VIX-Linked Exchange Traded Products

by InvestorLawyers

stock market chart A recent spike in stock market volatility has brought into focus the enormous risks associated with certain exchange-traded-products (ETPs) linked to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). However, these products have previously been the subject of several warnings by the Financial Industry Regulatory Authority (FINRA).

Created in 1993, the VIX attempts to track broadly measured volatility in the market. VIX is an index, not a security, but certain ETPs have attempted to allow investors to track the performance of the VIX index. One such ETP is Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (ticker symbol XIV), which the issuer shuttered earlier this month after investors experienced unexpectedly large losses during a spike in the VIX. Other ETP products that may pose similar risks include Proshares SVXY, VelocityShares ZIV, iPATH XXV, and REX VolMaxx VMIN.

ETPs have previously come under scrutiny by FINRA. In October of 2017, FINRA ordered Wells Fargo to pay $3.4 million in restitution to investors relating to unsuitable recommendations of volatility-linked ETPs. FINRA also has published Regulatory Notice 17-32, regarding sales practice obligations, which cautions brokerage firms that many volatility-linked ETPs are highly likely to lose value over time and may be unsuitable to retail investors, particularly those who plan to use them as traditional buy-and-hold investments. Previously, in 2012, FINRA called for heightened supervision by brokerage firms regarding complex investment products in Regulatory Notice 12-03, specifically warning of the risks posed by investment products tied to the VIX.

Published on: December 19, 2017

SEC Censures Ameriprise in Connection With Sales of F-Squared AlphaSector Strategies

by InvestorLawyers

financial charts and stockbroker On December 8, 2017, the Securities and Exchange Commission (“SEC”) issued a Cease-and-Desist Order (“Order”) against Ameriprise Financial Services, Inc. (“Ameriprise”) in connection with allegations that Ameriprise and its employees or agents purportedly misrepresented the performance of certain ETF strategies. Specifically, the SEC’s investigation focused on sales of AlphaSector strategies by ETF manager F-Squared Investments, Inc. (“F-Squared”). The F-Squared AlphaSector strategies, which were based upon an algorithm, were sector rotation strategies designed to issue a “signal” as to whether to buy or sell certain ETFs, that together, comprised the industries in the S&P 500 Index.

Pursuant to the Order, the SEC has alleged that F-Squared materially miscalculated the historical performance of its AlphaSector strategies (from April 2001 to September 2008) by incorrectly implementing signals in advance of when such signals could have occurred. In addition, the SEC alleged that F-Squared relied upon hypothetical and back-tested historical performance that was purportedly inflated substantially over what actual performance would have been had F-Squared applied the signals accurately.

In December 2014, F-Squared agreed to pay a $35 million fine to the SEC, and furthermore, admitting to wrongdoing regarding falsifying performance numbers in its advertising and marketing materials. See In the Matter of F-Squared Investments, Inc., Admin. Proceeding No. 3-16325 (Dec. 22, 2014). By July 2015, F-Squared filed for Chapter 11 bankruptcy protection.

Published on: November 2, 2017

3x Leveraged and Inverse ETFs May Give Rise To Investor Claims

by InvestorLawyers

Money Bags Investors who purchased shares in a leveraged inverse ETF or mutual fund upon the recommendation of their financial advisor may have arbitration claims. In today’s investment environment, many retail investors have been coaxed into investing in financial products beyond the traditional universe of stocks, bonds, and bank deposit products such as CDs. One such alternative or non-conventional investment product that has gained in popularity over the past decade with retail investors is the leveraged inverse ETF (more commonly referred to as an “ultra short fund”).

Essentially, leveraged inverse funds seek to deliver the opposite of the performance of the index or benchmark that they track. These ultra short funds employ a strategy akin to short-selling a stock (or basket of stocks), in conjunction with employing leverage, and in so doing these funds seek to achieve a magnified return on investment that is a multiple of the inverse performance of the underlying index.

For example, the ProShares UltraPro Dow30 ETF (NYSE: SDOW) is structured to provide a return that is -3% of the return of the underlying index, the Dow Jones Industrial Average. Thus, if the Dow Jones were to lose 1% in value, SDOW is structured to gain 3%. While in theory this might seem a straightforward proposition, the fact is that such ultra short funds are exceptionally complicated and risky financial products.

Published on: October 25, 2017

Volatility Linked ETF Investors May Have Arbitration Claims

by InvestorLawyers

Cage Money Recently, the Financial Industry Regulatory Authority (“FINRA”) ordered Wells Fargo & Co. to pay a $3.4 million fine in connection with sales practice issues related to recommendations of volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) to customers. Specifically, FINRA determined that between July 2010 and May 2012, some Wells Fargo brokers affiliated with the company’s wealth management business recommended that their customers purchase volatility-linked exchange-traded funds (“ETFs”) and volatility-linked exchange-traded notes (“ETNs”) “without fully understanding their risks and features.” In addition, FINRA indicated that Wells Fargo lacked the appropriate supervisory procedures and safeguards to facilitate sales of the volatility-linked investment products.

By their very nature, volatility-linked investments are designed to return a profit when the market experience choppiness (or volatility) and are not intended for ordinary investors. In fact, when volatility-linked ETFs began rolling out to retail investors in early 2011, Michael L. Sapir, Chairman and CEO of ProShare Capital Management, stated that “The intended audience for these ETFs are sophisticated investors.”

Investing in a volatility-linked product is a very risky enterprise that is likely only suitable for professional investors seeking to trade on a short-term basis (e.g., several hours or day trading). Furthermore, because the VIX or so-called ‘fear index’ is not actually tradeable, investors who wish to invest in the VIX must trade derivatives instead (including volatility-linked ETFs and ETNs)- products that are beyond the understanding of ordinary retail investors.

Published on: June 10, 2015

LPL Financial Fined $10 Million For Failure To Supervise Brokers

by InvestorLawyers

The Financial Industry Regulatory Authority (FINRA) recently fined LPL Financial $10 million fine and ordered it to pay $1.7 million in restitution to investors who lost money with LPL brokers. The charges levied by FINRA alleged widespread supervisory failures involving securities such as nontraditional exchange-traded funds, variable annuities and non-traded real estate investment trusts (or REITs).

LPL’s failure to supervise sales of nontraditional ETFs continued into 2015, according to FINRA. FINRA also alleged that LPL failed to have adequate supervisory systems and guidelines for sales of nontraded REITs from January 2007 to August 2014. LPL consented to the fine without admitting or denying the charges.

This was not LPL’s first regulatory issue concerning lack of supervision concerning high-commission investments such as non-traded REITs. In March 2014, FINRA fined LPL $950,000 for supervisory deficiencies related to sales of a wide range of alternative investment products. These include nontraded REITs, oil and gas partnerships, business development companies, hedge funds, managed futures and other illiquid investments.

Published on: February 23, 2015

Investors Over-Concentrated In Funds Exposed To Losses Due To Drops In Oil Prices May Have Viable Arbitration Claims

by InvestorLawyers

Oil prices have rapidly tumbled to under $50 a barrel, from well over $100 a barrel, leaving prices at their lowest level since 2009. As a result of the plummet in oil prices, some investors whose portfolios were concentrated in investments whose value is linked to the price of oil or other energy products have lost significant sums. Such investments may include private placements, stocks, and ETFs. On the private placement side alone the Securities Exchange Commission (SEC), has stated that since 2008, approximately 4,000 oil and gas private placements have attempted to raise nearly $122 billion in investor capital. However, research has shown that some of these oil and gas private placements pose enormous risks and, a significant majority of the oil and gas funds offered by some sponsors have lost money (even before the recent drop in oil prices).

Leveraged ETFs

In addition to the inherent risks of such investments, some investors’ portfolios may be over-concentrated in oil and gas stocks or ETFs. Some of these ETFs may be leveraged or non-traditional ETFs. These types of funds will tend to rise or fall in value even more rapidly than the price of oil and gas, due to internal leverage, or the borrowing of money by the funds to increase their exposure energy prices.

Published on: April 22, 2014

ETF, ETN Investors Could Recover Losses

by InvestorLawyers

Lawyers are investigating claims on behalf of investors who suffered significant losses in exchange-traded notes (ETNs) and exchange-traded funds (ETFs) issued by Credit Suisse and other full-service brokerage firms.

ETF, ETN Investors Could Recover Losses

According to Bloomberg, the $45,000 loss suffered by Jeff Steckbeck in TVIX, a Credit Suisse Group AG note, has set off a probe by the Securities and Exchange Commission. Reportedly, ETNs became more popular with the TVIX in February 2012. That month, Credit Suisse stopped selling the ETN and rising demand caused the investment to veer up to 89 percent from the index. When Credit Suisse began issuing the notes again in March of that year, a FINRA warning cautioned investors that ETNs could trade at a price that was higher than their underlying index.

Bloomberg data indicates that the estimated initial value of the securities is typically 2 to 4 percent less than the price investors paid. Exchange-traded notes like TVIX mimic assets through the use of derivatives and their value is based on volatility shifts in the market. However, the ETN market is small beans compared to the ETF market, which has around $2.4 trillion in assets.

Published on: April 3, 2014

Claims Against Berthel Fisher for Unsuitable Sale of Alternative Investments Begin

by InvestorLawyers

Our recent blog post, “Berthel Fisher and Affiliate Fined Regarding Sales of ETFs and Non-Traded REITs,” reported that in February the firm had been fined $775,000 by the Financial Industry Regulatory Authority (FINRA). The FINRA fines addressed alleged supervisory failures, including failure to properly supervise the sale of alternative investments like leveraged and inverse exchange-traded funds (ETFs) and non-traded real estate investment trusts (REITs). One claim has already been filed by investment fraud lawyers on behalf of a retired woman in Minnesota.

Claims Against Berthel Fisher for Unsuitable Sale of Alternative Investments Begin

According to the claim, the woman was sold non-traded REITs and other alternative investments by Jonathan Pyne, a broker for Berthel Fisher. The claim argues that her age and low risk tolerance made the investments unsuitable for her. The investments included:

Inland American Real Estate Trust

Published on: March 13, 2014

Berthel Fisher, Affiliate Fined Regarding Sales of ETFs and Non-traded REITs

by InvestorLawyers

Securities fraud lawyers are currently investigating claims on behalf of the customers of Berthel Fisher & Co. Financial Services Inc. and Securities Management & Research Inc., a Berthel Fisher affiliate in Marion, Iowa. In February, the Financial Industry Regulatory Authority (FINRA) announced that it had fined the two a total of $775,000 for supervisory deficiencies. The deficiencies included Berthel Fisher’s failure to properly supervise the sale of leveraged and inverse exchange-traded funds and non-traded real estate investment trusts.

Berthel Fisher, Affiliate Fined Regarding Sales of ETFs and Non-traded REITs

According to the FINRA investigation’s findings, Berthel Fisher did not have adequate written procedures and supervisory systems in place from January 2008 to December 2012 for the following alternative investments:

Non-traded REITs