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FINRA Sanctions Wells Fargo, Citigroup, Morgan Stanley & UBS

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Sales tactics for leveraged and inverse exchange-traded funds draw fines and client restitution requirements from FINRA.

The Financial Industry Regulatory Authority (FINRA) announced that it has sanctioned Citigroup Global Markets, Inc; Morgan Stanley & Co., LLC; UBS Financial Services; and Wells Fargo Advisors, LLC a total of more than $9.1 million for selling leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for not having a reasonable basis for recommending the securities. The firms were fined more than $7.3 million and are required to pay a total of $1.8 million in restitution to certain customers who made unsuitable leveraged and inverse ETF purchases.

FINRA sanctioned the following firms:

  • Wells Fargo – $2.1 million fine and $641,489 in restitution
  • Citigroup – $2 million fine and $146,431 in restitution
  • Morgan Stanley – $1.75 million fine and $604,584 in restitution
  • UBS – $1.5 million fine and $431,488 in restitution

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, 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. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”

ETFs are typically registered unit investment trusts (UITs) or open-end investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market.

FINRA found that from January 2008 through June 2009, the firms 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. As a result, the firms did not have a reasonable basis to recommend the ETFs to their retail customers. The firms’ registered representatives also made unsuitable recommendations of leveraged and inverse ETFs to some customers with conservative investment objectives and/or risk profiles. Each of the four firms sold billions of dollars of these ETFs to customers, some of whom held them for extended periods when the markets were volatile.

Leveraged and inverse ETFs have certain risks not found in traditional ETFs, such as the risks associated with a daily reset, leverage and compounding. Accordingly, investors were subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark when held for longer periods of time, particularly in the volatile markets that existed during January 2008 through June 2009. Despite the risks associated with holding leveraged and inverse ETFs for longer periods in volatile markets, certain customers of these firms held leveraged and inverse ETFs for extended time periods during January 2008 through June 2009.

In settling these matters, the firms neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.

Florida Securities Litigation and FINRA Arbitration

Contact Fort Lauderdale securities litigation attorney Howard N. Kahn, Esq. if you or someone you know has a securities dispute. In addition to being an experienced securities litigation attorney, Mr. Kahn also serves as a FINRA arbitrator for individual investors, brokers, and brokerage firms. You can reach him at 954-321-0176 or online.

Morgan Stanley to Lay-Off 1,600 Bankers and Support Staff

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Pink slips will go out to 1,600 Morgan Stanley employees soon. The firm has Florida offices in Boca Raton and Miami, but details by office location were not disclosed. Half of the lay-offs are expected in the U.S., with the balance of staff reductions overseas. Highly paid investment bankers are targeted, as well support team members.

Click on the link to watch a video news report of the Morgan Stanley staff cuts from Bloomberg News.

According to an early 2012 New York Times article, “the average base pay for managing directors at Morgan Stanley has risen to $400,000 and to $600,000 at Goldman Sachs.” Most Wall Street employees, particularly bankers and senior executive, earn a large annual bonus which may be paid in cash or stock. Morgan Stanley capped 2011 cash bonuses at $125,000, according to the Times.

Overall, compensation and benefits expenses in the third quarter of 2012 were $1,638 million, up almost 8 percent from the comparable prior year quarter. As of September 30, 2012, the Company had 57,726 employees worldwide.

Morgan Stanley, a leading competitor to Goldman Sachs, conducts its business from its headquarters in and around New York City, its regional offices and branches throughout the U.S. and its principal offices in London, Tokyo, Hong Kong and other world financial centers.

Fort Lauderdale Securities Litigation and Arbitration Attorney

Contact Fort Lauderdale securities litigation and arbitration attorney Howard N. Kahn, Esq. if you or someone you know has a securities or broker dispute. He is an experienced securities litigation and arbitration attorney, and is available to assist individual investors, brokers, and brokerage firms involved in securities matters. You can reach him at 954-321-0176 or online.