Morgan Stanley Smith Barney LLC today announced restrictions on the sale of leveraged, inverse, and leveraged-inverse exchange traded funds by its brokers and advisers.
Starting today, solicited purchases of such ETFs won’t be permitted in its traditional MSSB brokerage accounts, the firm said in a statement.
“Unsolicited purchases in these accounts will be permitted only subject to enhanced oversight and review,” the statement said. “In addition, no purchases of these securities will be permitted in advisory accounts managed by Morgan Stanley Smith Barney financial advisors.”
MSSB advisers have been encouraged to review existing positions in leveraged, inverse and leveraged-inverse ETFs with clients to emphasize their unique characteristics and risks, the statement said.
The move is in response to concerns raised by regulators about such potentially volatile ETFs, MSSB said.
The
Financial Industry Regulatory Authority Inc. warned brokers in June that inverse and leveraged ETFs “typically are unsuitable for retail investors” who hold them longer than a day.
Finra of New York and Washington clarified its position on such ETFs in a podcast July 13 in which it said member firms could recommend that a retail investor hold them for longer than one day, provided a suitability assessment is conducted with respect to such an investor and the ETF.
The move by MSSB is just the latest headache for the providers of these ETFs.
Since Finra came out with its initial statement, 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 have all restricted the sale of these investments, or have stopped selling them all together.
Also, a complaint seeking class-action status was filed Wednesday in the U.S. District Court for the Southern District of New York against ProShare Advisors LLC of Bethesda, Md., the largest provider of inverse, leveraged and leveraged-inverse ETFs, alleging it filed to disclose the risks inherent in its ProShares UltraShort Real Estate Fund (SRS), a leveraged-inverse ETF.
The allegations are “without merit,” ProShare said in a statement.
Massachusetts regulators, however, suspect there may be something wrong with how the funds are marketed.
Secretary of the Commonwealth
William F. Galvin sent subpoenas July 31 to Edward D. Jones, Ameriprise, LPL and UBS, asking about their sales practices with regard to inverse and leveraged exchange traded funds.
Direxion Funds of Newton, Mass., ProShare Advisors and Rydex SGI of Rockville, Md., the primary providers of inverse and inverse ETFs, also received letters from Mr. Galvin asking for similar information.
