How regulators piled onto the ETF controversy

The Financial Industry Regulatory Authority Inc.'s June warning about leveraged and inverse ETFs set off alarm bells by saying that the products “typically are unsuitable for retail investors” who hold them longer than a day. In reaction, a number of brokerage firms quit selling the products, or began taking only unsolicited orders for the products. In late July, William Galvin, secretary of the Commonwealth of Massachusetts,subpoenaed four brokerage firms, demanding information about the way they sold inverse and leveraged ETFs. Last month, the SEC hopped on board with an investor alert, co-authored with Finra, titled “Leveraged and Inverse ETFs: Specialized Products with Extra Risks for Buy-and-Hold Investors.” Not to be outdone, several plaintiff's lawyers filed suit in August against ProShares Advisors LLC over alleged defects in the ProShares UltraShort Real Estate ETF (SRS). The claim, filed in U.S. District Court for the Southern District of New York, says the fund, which seeks to track 200% of the inverse of the daily performance of the Dow Jones U.S. Real Estate Index, fell 48.2% last year while the DJREI dropped 39.2%. “The SRS Fund is, therefore, the equivalent of a defective product,” the claim says. “The allegations reported in the complaint are wholly without merit [and] we plan to defend against this suit vigorously,” a ProShares spokesman said in a statement. Finally, at the end of last month, Finra increased margin requirements for leveraged ETFs, effective Dec. 1.