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FINRA Focuses on Leveraged ETFs in 2013

FINRA to Focus Regulatory Eye on Leveraged ETFs in 2013

The Financial Industry Regulatory Authority has announced that it plans to focus on leveraged exchange-traded funds (ETFs) in 2013.

Typical ETFs are securities that track an index (like the S&P 500), a commodity, or a basket of securities, and that trade on the listed exchanges (such as NASDAQ) in the same manner as traditional stocks. Unlike typical ETFs, however, which seek to amplify the annual returns of an index, leveraged ETFs follow the index’s changes on a daily basis. Leveraged ETFs also invest in derivatives. These crucial differences in ETFsadd an extra level of risk to the investment that most investors don’t understand.

“Retail investors may not understand the differences among exchange-traded index products (e.g., funds, grantor trusts, commodity pools and notes) and the risks associated with these investments, particularly those that employ leverage to amplify returns,” wrote FINRA in its 2013 regulatory and examination priorities letter. “We are also concerned about the proliferation of newly created index products lacking an established track record, such as those with valuations and performance tied to volatility, emerging markets and foreign currencies.”

Also noted as priorities for the regulator in 2013 were broker suitability, complex products, non-traded REITS, business development companies (BDCs), and the use of automated investment advice. To learn more about FINRA’s plans for this year, access the 2013 letter in the link above.

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