FINRA Has Firms Scrambling, As Morgan Stanley Is Next To Review Leveraged ETFs

The Financial Industry Regulatory Authority (FINRA)  warned brokers and registered investment advisers a month ago about their fiduciary duties when selling inverse and leveraged ETFs.  Since then the financial industry has been scrambling to review their practices.  The industry was certainly listening because all of a sudden UBS Halted Inverse And Leveraged ETF Trading, and last week Two More Firms Banned Sales of Leveraged ETFs.

Following the warning to the financial industry, FINRA said recently in a podcast On Leveraged ETFs that “Leveraged and inverse ETFs can be appropriate if recommended as part of a sophisticated trading strategy that will be closely monitored by a financial professional. At times, this trading strategy might require a leveraged or inverse ETF to be held longer than one day.”

Firms continue to investigate their practices as Daisy Maxey from the WSJ reports today: “Morgan Stanley Smith Barney is reviewing its sales practices regarding leveraged exchange-traded funds.” Asked if it is reconsidering sales of leveraged exchange-traded funds, Christine Pollak, a spokeswoman for Morgan Stanley Smith Barney, said Wednesday, “the issue is under review.”

Fidelity Investments said on Tuesday that it makes the ETFs available to customers who wish to purchase them, adding, “We are aware of recent regulatory and industry discussion about these products and we are carefully following that discussion.” Online brokerage firm TD Ameritrade Holding Corp. (NASDAQ:AMTD) doesn’t actively sell leveraged ETFs, but they are available on its Web platform for clients to purchase, a spokeswoman said.

Is there some other underlying theme, other than investor education, that would warrant these firms to remove such a valuable trading tool from investor’s hands?  Why would a financial firm stop selling a product and potentially cut into profits, when these trading vehicles have become so popular?

Only time will tell, and these questions will be answered.

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