Fidelity Blocks Opening Trades on ETF Products Because of Suitability Concerns

As federal regulators crack down on exchange-traded funds (ETFs) because of the high risk they pose to investors and the markets, Fidelity Investments’ brokerage is restricting opening transactions in some exchange-traded products. Fidelity is claiming that its decision to bar retail customers from buying the products stems from suitability concerns, rather than regulatory pressure. Fidelity spokesman Robert Beauregard stated: “as part of our responsibilities to our retail account holders, we continually review security products being offered to our retail brokerage customers to ensure that they are at least generally suitable for some customers, and that we are able to support them appropriately.” This could include ETFs that exceed a 10% tracking error on their benchmarks or when they have traded at a 10% or greater discount or premium the previous 30 days. Other factors that could affect this are whether there are excessively complex or unique features, or unusual risks, and whether comparable securities that are less complex may be available, liquidity in the marketplace, quality and ease of access for retail customers to material information available about the securities and fess associated with the product.

Other brokerage firms such as Schwab will occasionally warn investors that a particular ETF might be appropriate for the average investor, but wont keep the investor from making the purchase. Instead, the firm provides a lengthy warning about inverse or leveraged ETFs. The Financial Industry Regulatory Authority (FINRA) has also been warning about leveraged and inverse ETFs for a long time. The SEC is currently pondering placing sharp restrictions on funds that use excessive leverage. This seems to be the first step in holding brokers and brokerage firms to a higher standard of fiduciary duty, by steering clients away from products with high risk, illiquidity and structural unreliability.

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