In the wake of a FINRA Regulatory Notice and a number of articles in the financial press, some brokerage firms say they are either issuing warnings about the products or silently following the discussions surrounding them. So reports Daisey Maxey of the Wall Street Journal in her July 30 article entitled “Warning Signs Up for Leveraged ETFs. Morgan Stanley Smith Barney says its sales of leveraged and inverse ETFs is “under review.” Charles Schwab says it is warning clients to “proceed with extreme caution” because “these funds may not give you the returns you may be expecting.” Schwab says that, while it does not “recommend” leveraged ETFs, investor may purchase them on their own through Schwab. Likewise, TD Ameritrade says it does not “actively sell” leveraged ETFs but they are available on its web platform.
Despite the fact that leveraged and inverse ETFs are unsuitable for most retail investors, it appears that these firms may believe they can continue to sell them with impunity because they are not making a “recommendation” that their customers purchase them. In contesting customer claims based on unsuitability in FINRA arbitration proceedings, firms often argue that the FINRA’s “suitability” rules do not apply to them because they were mere “order takers” and did not “recommend” the security at issue.
FINRA and the NYSE, however, both define the term “recommendation” very broadly as follows: “For purposes of these standards, the term “recommendation” includes any advice, suggestion or other statement, written or oral, that is intended, or can reasonably be expected, to influence a customer to purchase, sell or hold a security.” FINRA Incorporated NYSE Rule Interpretation, Rule 472/09.
In addition, “a broad range of circumstances may cause a transaction to be considered recommended, and this determination does not depend on the classification of the transaction by a particular member as “solicited” or “unsolicited.” In particular, a transaction will be considered to be recommended when the member or its associated person brings a specific security to the attention of the customer through any means, including, but not limited to, direct telephone communication, the delivery of promotional material through the mail, or the transmission of electronic messages.” NASD Notice to Members 96-60.
Before concluding that no recommendations are being made, firms would be well advised to review all sales materials and web postings very carefully to determine whether statements have been made that could reasonably be expected to influence a customer to purchase leveraged or inverse ETFs and consider whether they are bringing leveraged or inverse ETFs to the attention of customers.
J. Boyd Page, senior partner of Page Perry in Atlanta, urges investors to be extremely wary of these investments. “These leveraged and inverse ETF’s are extremely complex and can be highly toxic. They are unsuitable for all but the extremely sophisticated who understand the full complexities of the investment, who are aware of the high risk of loss, and who can afford to bear substantial losses.”
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 30 occasions. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their ETF investment problems. For further information, please contact us.