By Jessica Toonkel and Suzanne Barlyn
NEW YORK May 1 Citigroup Inc Morgan
Stanley, UBS AG and Wells Fargo & Co on
Tuesday agreed to pay more than $9.1 million in fines and
restitution for selling leveraged and inverse exchange-traded
funds "without reasonable supervision."
The Financial Industry Regulatory Authority, which levied
the sanctions, said the firms sold these ETFs without "a
reasonable basis for recommending the securities," according to
Leveraged and inverse ETFs are designed to amplify
short-term returns by using debt and derivatives and are
considered more suitable for professional traders than for
long-term retail investors. They make up only $29.3 billion of
the $1.15 trillion U.S. ETF market, according to Lipper.
FINRA found that, from January 2008 through June 2009, the
brokerage firms did not have the supervisory systems in place to
properly monitor the sales of leveraged and inverse ETFs and
failed to conduct adequate due diligence regarding the risks and
features of the ETFs, according to the statement.
Settlement agreements the four brokerages signed with FINRA
show the extent to which customers invested billions in the
risky securities as the market grew. Investors bought and sold
about $27.1 billion collectively in the risky ETFs from the four
brokerages during period, according to a review of the
Wells Fargo customers transacted the most business of the
four groups, buying and selling a total of $9.9 billion,
followed by Citi ($7.9 bi llion), Morgan Stanley ($4.8 billion)
and UBS ($4.5 billion).
In all of the cases, the regulator found that the brokerages
did not have adequate supervision systems for their brokers, and
other procedures in place to ensure that sales of the ETFs
complied with FINRA rules, according to a settlement.
Citigroup was fined $2 million and ordered to pay $146,431
in restitution. Wells Fargo was fined $2.1 million and ordered
to pay $641,489 in restitution. Morgan Stanley was fined $1.75
million and ordered to pay $604,584, and UBS was fined $1.5
million and ordered to pay $431,488. FINRA determines fines for
its members based on a series of sanctioning guidelines.
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
Each firm's settlement refers to investors who had purchased
the risky ETFs recommended by their broker -- even though they
were not buy-and-hold investments. The investors were mostly in
their mid-50s or older who had conservative investment profiles
with limited or no risk tolerance.
* At Citi, a 59-year-old investor with a conservative
risk profile and net worth less than $600,000 held one of the
securities for 122 days in an IRA account and lost more than
* A 65-year-old conservative customer of Wells Fargo
with a stated net worth less than $50,000 held a non-traditional
ETF for 43 days and sustained losses of more than $25,000.
* At Morgan Stanley, an 89-year-old investor with a net
worth under $200,000, allocated nearly 60 percent of an account
to non-traditional ETFs for 39 days, losing more than $10,000.
* A 64-year-old UBS customer with a conservative risk
tolerance profile and net worth of $290,000 held a
non-traditional ETF for 139 days in his IRA account and
sustained losses of more than $5,700 -- 43 percent of his
Spokespeople from the four brokerages said they were pleased
to resolve the 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.
UBS has adopted training, supervisory and other policies,
according to spokeswoman Karina Byrne. Morgan Stanley has
"substantially limited its sale of "these specific types of
investments and enhanced our tools to supervise them," said
spokeswoman Christine Pollak. The action, she said, relates to
investments sold three to four years ago.
Leveraged and inverse ETFs "became increasingly popular with
a wider range of retail investors" during a short period that
coincided with market volatility, a Wells Fargo spokesman said,
adding the firm has enhanced its procedures since then.