Securities Lawyers Blog
The Financial Industry Regulatory Authority (FINRA) ordered brokerage firms Stifel, Nicolaus & Company, Incorporated (Stifel Nicolaus) and Century Securities Associates, Inc. (Century Securities) to pay combined fines of $550,000 and nearly $475,000 in restitution to 65 customers concerning allegations of the improper sale of leveraged and inverse exchange-traded funds (ETFs). Stifel Nicolaus and Century Securities are affiliates and are both owned by Stifel Financial Corporation.
A leveraged ETF employs debt or leverage in order to increase and magnify the returns of the underlying securities. Leveraged ETFs are generally available for most investment indexes such as the S&P 500, the Dow Jones, commodities, or foreign exchanges. Many leveraged ETFs carry leverage as high as 300% leverage and will typically return 3% if the underlying index returns 1%. Leveraged ETFs can also be designed to return the inverse or opposite of the benchmark.
Leveraged ETFs are generally used and are only appropriate for short term trading. The Securities Exchange Commission (SEC) has warned that most leveraged ETFs reset daily, meaning that they are designed to achieve their stated objectives on a daily basis. As a result, the performance of nontraditional ETFs held over the long term can differ significantly from the performance of their underlying index or benchmark during the same period. Thus, even if an index is relatively flat over a period of time, a leveraged ETF may still decline in value during the same period.