Galvin demands answers from firms selling inverse and leveraged ETFs

Massachusetts regulator subpoenaed Edward D. Jones, Ameriprise, LPL and UBS Financial

Aug 3, 2009 @ 3:58 pm

By David Hoffman

Massachusetts regulators sent subpoenas to four brokerage firms on Friday asking about their sales practices relating to inverse and leveraged exchange traded funds weeks after Edward D. Jones, Ameriprise, LPL and UBS restricting the sale of the products or stopped selling them altogether.


The four firms are Edward D. Jones & Co. LP of St. Louis, Ameriprise Financial Inc. of Minneapolis, LPL Investment Holdings Inc. of Boston and UBS Financial Services Inc. of New York.

“The concern is that [inverse and leveraged ETFs] are, or can be, very volatile funds, very risky, and that they are being offered to investors who aren't sophisticated and may not be aware of the risks they are getting into,” said Brian McNiff, a spokesman for Secretary of the Commonwealth William F. Galvin.

Direxion Funds of Newton, Mass., ProFund Advisors LLC of Bethesda, Md., and Rydex SGI of Rockville, Md. — the primary providers of inverse and inverse ETFs — also received letters from Mr. Galvin asking for similar information, Mr. McNiff said.

The Massachusetts investigation comes after the Financial Industry Regulatory Authority Inc. of New York and Washington warned brokers last month that inverse and leveraged ETFs “typically are unsuitable for retail investors” who hold them longer than a day.

Finra clarified its position on such ETFs in a podcast on July 13 in which it said member firms could recommend that a retail investor hold such ETFs for longer than one day, provided a suitability assessment is conducted with respect to such an investor and the ETF.

But that didn't stop Edward D. Jones, Ameriprise, LPL and UBS from restricting the sale of leveraged and inverse ETFs, or stopping their sale all together.

Other brokerages such as Morgan Stanley Smith Barney of New York are contemplating restrictions, and last week Charles Schwab & Co. Inc. of San Francisco issued a warning to clients who buy them.


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