Massachusetts Files Action Against RBC for Improper Sales of Exotic Exchange Traded Funds (ETFs)


The Massachusetts securities division regulator has filed an administrative action against RBC Capital Markets LLC and one of its former registered representatives, Michael D. Zukowski relating to sales of inverse, leveraged, inverse-leveraged, and other non-traditional exchange traded funds. The regulator seeks an order, among other things, requiring RBC and Zukowski to make full restitution to investors who lost money in as a result of unsuitable sales such funds, and pay fines.

The division’s investigation revealed, among other things, that such non-traditional exchange traded funds were sold to RBC clients who had limited or no understanding of these products and the unique risks associated with them. In particular, these exotic exchange traded funds are particularly complex and risky in that they are designed to invest as if the investor is using borrowed funds (leveraged ETFs) or to capitalize on the opposite direction of a market or index (inverse-leveraged ETFs), mainly by using exotic financial instruments such as futures and swaps contracts. In addition, due to the effect of daily compounding of returns, the long-term performance of these exchange traded funds may be dramatically different from the benchmark. For example, an exchange traded fund that is supposed to return 200% of an indexes return actually declined in value though the index rose.

Secretary of the Commonwealth William F. Galvin said RBC and Zukowski used “dishonest practices” in selling the funds, adding: “The point of the complaint is not that the investors lost money. The dishonesty here is that the investors, and indeed the agent soliciting their investment, did not understand the workings of these funds.”

Referring to exotic exchange traded funds, John Bogle, the founder of Vanguard and the creator of the first index mutual fund in 1975, warned: “It’s insanity. This is a classic case of Wall Street trying to capitalize on the worst instincts of investors.”

Investor attorney J. Boyd Page, the senior partner of Atlanta-based Page Perry, said: “Brokers are increasingly pressured to sell exotic ETFs and structured products that they do not understand to investors who do not understand them either. It’s the blind leading the blind. CPAs and other professionals who advise investors can help by being alert for losses in such products. They are often in a position to spot a situation that should be referred to an experienced attorney. Fortunately, in many cases, the law does provide a remedy for such abuses.”

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 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in cases involving non-conventional investments like leveraged exchange traded funds and structured products. For further information, please contact us.