Following Massachusetts Lawsuit LPL Changes ETF Compliance Policies

Attorney Advising Disclaimer

In the wake of the Massachusetts Securities Division's December 2012 lawsuit against LPL Financial LLC—in which state regulators charged LPL Financial with poor supervision and improper sales practices related to popular non-traded real estate investment trusts (REITs)—the defendant firm has made several changes to its policy approach to exchange traded funds (ETFs) transactions.

Among the changes coming to LPL, on April 1, representatives will be required to direct mutual fund orders through LPL's broker-dealer whereas previously, representatives were able to source the funds directly from sponsors such as ProFund Advisors LLC and ProShares. The move is predicted to give LPL greater control over these types of orders, which may likely improve the quality of the firm's supervisory capabilities.

LPL Financial previously decided to prohibit sales of exchange-traded notes and exchange-traded funds that are more than two times leveraged, a move borne out of the firm's creation of a "complex-products team" after Massachusetts began its investigation in July of 2012.

Unlike traditional mutual funds, ETFs trade securities on an exchange, with some trading at a multiple of daily performance. Many have their prices reset daily which means such ETFs are inappropriate for buy-and-hold investors.

Some basic ETF facts are:

  • ETFs are generally tied to an underlying benchmark or index;
  • Leveraged ETFs (sometimes called "ultra funds") perform at multiples of the underlying benchmark or index;
  • Inverse ETFs ("short funds") deliver the opposite of the performance of the underlying benchmark/index; and,
  • Leveraged inverse ETFs (sometimes called "ultra short funds") return a multiple of the performance delivered by an inverse ETF.

For instance, given a benchmark or index's performance of +10 during one trading interval:

>> A 2x leveraged ETF would return +20;

>> An inverse ETF would return -10; and

>> A 2x leveraged inverse ETF would return -20..

Some brokers throughout the financial industry have been found to have unsuitably recommended certain ETFs to retail customers who preferred "buy and hold" strategies and were not long-term investors. As a result, regualtors have sanctioned both stockbrokers and brokerage firms.

For instance, in May of 2012, FINRA sanctioned Wells Fargo, Citigroup, Morgan Stanley and UBS a total of $9.1 million for activity related to their collective sales of the various risky ETFs.

In that matter, FINRA uncovered multiple systematic problems at the four firms, including failure to adequately supervise, lack of due diligence, lack of reasonable basis with which to recommend ETF products, unsuitable recommendations of ETFs and allowing brokers and customers to hold ETFs for extended time periods even though ETFs are not suitable for conservative, long-term investors.

Jonathan W. Evans & Associates has tried, resolved, and is preparing arbitration claims against brokerage firms, brokers, registered investment advisors, and investment advisors for their sales of leveraged ETFs, inverse ETFs, and inverse leveraged ETFs.

If you have suffered losses from leveraged ETFs, inverse ETFs, or inverse leveraged ETFs, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

News: LPL beefing up its compliance in wake of Massachusetts Suit (InvestmentNews)