The North American Securities Administrators Association is alerting broker-dealers that they should carefully consider whether to permit purchases of leverage and/or inverse exchange-traded funds in retail customer accounts.
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In a report on broker-dealer sales practices connected with these nontraditional exchange-traded funds, the organization of state and provincial securities regulators said that the products can present greater risks to investors than do traditional ETFs due to their complexity.
"Registered representatives who recommend these products without fully understanding them and without receiving appropriate supervision by their firms pose a great risk to investors," said Michael S. Pieciak, NASAA president and Vermont Commissioner of Financial Regulation.
The NASAA report recommends tailored supervisory procedures be established for firms that allow leveraged and/or inverse ETF transactions. It also said that the supervisory procedures address the heightened and specific risks associated with these complex products.
NASAA's Broker-Dealer Section's Investment Products and Services Project Group collected information from 118 broker-dealers to gain a better understanding of whether registered representatives are recommending the purchase and sale of leveraged and/or inverse ETFs and, if those purchases and sales are permitted, how firms are supervising such transactions.
Most responding firms that allow customers to purchase and hold leveraged and/or inverse ETFs confirmed they have procedures for these transactions. Several firms, however, indicated they are addressing and monitoring customer suitability, including holding periods.
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"This suggests that there is room for improvement in the development and implementation of leveraged and/or inverse ETF-specific supervisory procedures," the report concludes.
