Citigroup, Morgan Stanley, UBS Financial, and Wells Fargo Advisors agreed to pay a combined $9.1 million to settle FINRA charges related to their sales of leveraged and inverse exchange-traded funds (ETFs) without reasonable supervision and for lacking a reasonable basis for recommending the securities.  The breakdown of the settlement, which includes over $7.3mn in fines and $1.8 million in restitution to certain customers, is as follows:

• Citigroup - $2 million fine and $146K in restitution.
• Morgan Stanley - $1.75 million fine and $605K in restitution.
• UBS - $1.5 million fine and $431K in restitution.
• Wells Fargo Advisors - $2.1 million fine and $641K in restitution.

"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. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."  -- Brad Bennett, FINRA EVP, Chief of Enforcement.

ETFs Defined. Typically registered unit investment trusts (UITs) or open-end investment companies (RICs) whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.  Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track.  Inverse ETFs seek to deliver the opposite of the performance of the index or benchmark they track, profiting from short positions in derivatives in a falling market. FINRA Findings and Allegations. From January 2008 through June 2009, the firms allegedly did not have adequate supervisory systems in place to monitor the sale of leveraged and inverse ETFs, and failed to conduct adequate due diligence regarding the risks and features of the ETFs - which resulted in their not having a reasonable basis for recommending the ETFs to retail customers. The respective RRs at each firm allegedly made unsuitable recommendations of leveraged and inverse ETFs, as well, to some customers with conservative investment objectives and/or risk profiles.  All told, each of the four firms sold billions of these ETFs to customers, some of whom held them for extended periods when the markets were volatile. Leveraged and inverse ETFs have certain risks not found in traditional ETFs - e.g., risks associated with a daily reset, leverage and compounding. When held for an extended period, investors become subjected to the risk that the performance of their investments in leveraged and inverse ETFs could differ significantly from the performance of the underlying index or benchmark, particularly in the volatile markets during the review period, 2008-2009. Accordingly, two elements of unsuitability were at play in these sales: (i) the sale of securities that held more risk than would be appropriate for certain customers;  and, (ii) the failure to direct shareholders that such securities were more conducive for trading, rather than long or longer-term investing. FINRA Staff Credits. Investigation by Robert Moreiro, Elena Kindler, Chun Li, Ron Sannicandro, Joseph Darcy, Elizabeth Da Silva, Patrick Hendry. For further details, go to:  [FINRA News Release, 5/1/12], and ...

• Citigroup Global Markets, Inc.:    AWC #20090191134.
• Morgan Stanley & Co. LLC:  AWC #20090181611.
• UBS Financial Services Inc.  AWC #20090182292.
• Wells Fargo Advisors, LLC, Wells Fargo Advisors Financial Network, LLC and Wells Fargo Investments, LLC  AWC #20090191139.