Citigroup Global Markets, Morgan Stanley, UBS Financial Services, and Wells Fargo Advisors were fined more than US$7.3 million and are required to pay a total of US$1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.
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That includes a US$2 million fine and $146,431 in restitution from Citigroup; a US$1.75 million fine and US$604,584 in restitution from Morgan Stanley; a US$1.5 million fine and US$431,488 in restitution from UBS; and a US$2.1 million fine and US$641,489 in restitution for Wells Fargo.
In a statement, FINRA said the four companies from January 2008 through June 2009 "did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs.
The firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
Commenting on the decision, FINRA executive vice president and chief of enforcement Brad Bennett said the added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers.
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By GlobalData"Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products," he added.
The firms said they supervised these non-traditional ETFs the same way they supervised traditional ETFs, but that the general supervisory systems in place were not tailored enough to address the risks and unique features involved with these products.
"UBS is pleased to have resolved this FINRA matter. More than two years ago, UBS developed and implemented enhanced training, suitability and supervisory policies and procedures regarding leveraged, inverse, and inverse-leveraged ETFs," a spokeswoman said in a statement.
