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Leveraged ETFs on the Hot Seat

tlydon@globaltrend.com (Tom Lydon)

Leveraged and inverse ETFs are feeling the heat of increased regulatory and media scrutiny after several brokers were fined for unsuitable sales of the complex products.

Senator Jack Reed, chairman of the Senate Banking Subcommittee on Securities, Insurance and Investment, has called for a second hearing about ETFs and related issues, InvestmentNews reports.

In the article, Reed said the Securities and Exchange Commission is closely monitoring ETFs.

“My hearing last fall shined a light on these products, which may be affecting market structure, volatility and price discovery, and have the potential to harm investors,” Reed said. “I think this market deserves more attention from both domestic and foreign regulators.”

Last year, a Senate subcommittee held a hearing on ETFs and their impact on market structure. [Subcommittee Hearing on ETFs]

The providers of leveraged and inverse ETFs say their products are designed to magnify the market’s returns on a daily basis, and are not designed for long-term investors.

“These products seek a daily goal,” said Andrew O’Rourke, chief marketing officer of Direxion Funds, in the InvestmentNews story. “They are absolutely not buy-and-hold investments and should not be viewed through the same lens as a typical buy-and-hold mutual fund.”

Last week, the Financial Industry Regulatory Authority sanctioned four banks and fined them a collective $9.1 million over improper sales of leveraged and inverse ETFs.

The four firms are Wells Fargo (WFC - News), Citigroup ( C), Morgan Stanley (MS - News) and UBS (UBS - News). [Banks Fined Over ETF Sales]

FINRA said the financial companies were fined for selling leveraged and inverse ETFs “without reasonable supervision and for not having a reasonable basis for recommending the securities.” [Inverse, Leveraged ETFs Raise Risks for Online Brokers]