WASHINGTON (AP) — Citigroup, Morgan Stanley, UBS and Wells Fargo are paying a total $9.1 million to settle allegations by industry regulators that they sold billions of dollars of volatile investments without properly assessing their risks and whether they were suitable for some retail customers.
Retail customers are individual investors as opposed to institutional investors such as pensionfunds and hedge funds.
The Financial Industry Regulatory Authority, the securities industry's self-policing organization, announced the settlement Tuesday with the four banks. FINRA fined the banks a total $7.3 million and they agreed to pay $1.8 million in restitution to some customers who bought the so-called leveraged and inverse exchange-traded funds from January 2008 through June 2009. The banks neither admitted nor denied wrongdoing.
Traditional exchange-traded funds, or ETFs, track a market index such as the Standard & Poor's 500 and can be traded throughout the day, unlike mutual funds. Leveraged ETFs seek to multiply returns of a market index or benchmark, often in volatile areas such as commodities or currencies that involve derivatives like futures contracts and swaps.
Inverse or "short" ETFs seek to bet against the index or benchmark they track as protection against market downturns.
FINRA said that the banks lacked adequate procedures to monitor sales of leveraged and inverse ETFs by their brokers. The banks failed to properly assess the risks of the investments and therefore "did not have a reasonable basis to recommend the ETFs to their retail customers," FINRA said. It said brokers made recommendations that were unsuitable for some retail customers with conservative investment goals and risk profiles, and some customers held the ETFs for long periods when the markets were volatile.
FINRA and the Securities and Exchange Commission have previously warned the investing public about the risks of leveraged and inverse ETFs, especially for those investing for the long term. In addition, FINRA imposed restrictions on leveraged ETFs in 2009, increasing the amount an investor must deposit with a broker before he or she can borrow to invest "on margin" in the products.
"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," Brad Bennett, FINRA's executive vice president and chief of enforcement, said in a statement Tuesday.
Citigroup is paying a $2 million fine and $146,431 in restitution; Morgan Stanley, a $1.75 million fine and $604,584 in restitution; UBS, a $1.5 million fine and $431,488 in restitution; and Wells Fargo, a $2.1 million fine and $641,489 in restitution.