Stoltmann Law Offices are investigating cases where brokers have sold clients single-stock, Exchange-Traded Funds (ETFs). Massachusetts Secretary of the Commonwealth William Galvin office has announced a probe of single stock ETF offerings, according to Investment News. Galvin’s office, Investment News reports, is “seeking to protect ‘Main Street investors’ from harm by initiating a sweep of complex single stock exchange traded fund offerings recently made public.”
“These are risky products, investing in only one stock, with no diversity cushion whatsoever,” Galvin said in a statement. “For nearly all Main Street investors, there is no difference between investing your money in single-stock ETFs and gambling with that money at a casino,” he added. “Under no circumstances should an investor use these products as a long-term investment.”
ETFs are typically broad-based baskets of stocks, bonds and other securities in one package. They are known for their tradability and relatively low costs. But some of these products can pose high risks to investors, who can lose money.
Some ETFs use options to offer leveraged and inverse exposure to a single stock. In mid-July, Securities and Exchange Commission (SEC) Commissioner Caroline Crenshaw published a memo warning of the potential harm to investors who might not understand the high risks of trading these products.
“Because of the features of these products and their associated risks, it would likely be challenging for an investment professional to recommend such a product to a retail investor while also honoring his or her fiduciary obligations or obligations under Regulation Best Interest,” Crenshaw wrote.
“However, retail investors can and do access leveraged and inverse exchange-traded products through self-directed trading. While investors can gain similar upside and downside exposures to an equity security through the use of options and other derivatives, single-stock ETFs are likely to be uniquely accessible and convenient for self-directed retail investors, in particular.”
“As with other complex exchange-traded products, single-stock ETFs may be useful to certain investors who understand their unique features,” Ms. Crenshaw warns. “However, they are risky products for investors and potentially for the markets, as well. The arrival and proliferation of these products on the market underscores the importance of addressing the investor protection concerns and market risks that these and other exchange-traded products can entail.”
“With respect to single-stock ETFs in particular, I am disappointed that the Commission has thus far failed to make use of the tools it does have, such as rulemaking under the Investment Company Act of 1940 and/or the Securities Exchange Act of 1934, to grapple with the question of whether these products are appropriate in the public interest and consistent with the protection of investors. I strongly encourage my colleagues to consider rulemaking in this case.”
Brokerage firms are legally required by FINRA to monitor what their brokers are selling – their investments must be vetted and authorized by the firms – and have an obligation to investors to fully reveal true risk and return information about the vehicles sold. Broker-dealers and advisors are also required to fully vet all of the investments they are selling to determine if they are suitable for your age and risk tolerance, in accordance with Regulation Best Interest.
Investors can file FINRA arbitration complaints if these rules are broken. If you invested with a broker-advisor and lost money as a result, you may have a claim to pursue through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!
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