Articles Tagged with warning

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.

According to an article in yesterday’s InvestmentNews entitled “Massachusetts follows FINRA’s Lead with Crackdown on Rogue Brokers,” the state’s Securities Division launched a sweep of 241 firms with above-average numbers of broker with misconduct reports on their records. The point of the “sweep” is to learn details of broker-dealers’ hiring policies and procedures. Firms that hire brokers with checkered pasts may turn them into places that harm investors. These firms will receive stronger scrutiny from FINRA, which is stepping up its use of data to identify brokers with a record of compliance problems who keep resurfacing, and is warning firms not to rehire them. FINRA’s “firm culture” examination to evaluate brokerages was launched earlier this year.

Massachusetts requested hiring information from January 2014 to the present, including a number of brokers fired or placed on heightened supervision in that period. Firms have until June 20th to respond. The letter went to firms in which over 15% of their current reps have at least one current disclosure incident on their record, according to the statement. That number exceeds the average percentage found among all Massachusetts-registered broker-dealers, according to the statement. Disclosure events can be allegations from disputes that end up in securities arbitration to illegal conduct, according to the state’s Securities Division.

Retail investors are being warned about the sale of indexed annuities. An indexed annuity is one that yields return on an investor’s contribution based on a specific equity-based index. They can be purchased from an insurance company, and similar to other types of annuities, the terms and conditions associated with payouts will depend on what is stated in the original annuity contract. Insurance companies commonly offer a provision of a guaranteed minimum return with indexed annuities, so even if the stock index does poorly, the annuitant will have some of his downside risk of loss limited. It is also common for an annuitant’s yields to allegedly be somewhat lower than expected due to the combination of caps on the maximum amount of interest earned and fee-related deductions. It is a somewhat controversial new investment strategy that promises returns tied to the stock market, and guarantees against losses if the market falls. Recently, a new warning was released, focusing on the fact that agents are being offered exotic trips and other perks for selling them.

Elizabeth Warren, the Democratic Senator from Massachusetts, issued letters to 15 of the country’s largest annuity issuers in April. Her concern was on the marketing materials associated with the indexed annuities, and aimed at the agents who sell them. Agents who sell more annuities were promised trips to California wine country, South Africa, or a tour of the Mediterranean on a private yacht. Also offered as incentives were cash rewards, cars and jewelry. Said Senator Warren: annuity sellers who are “more interested in earning perks than in acting in their client’s best interest can place Americans’ savings and retirement security at risk.”

Marijuana-related securities have blossomed in the past few years, taking the form of over-the-counter or penny stocks and special funds for accredited investors. This is because marijuana has been legalized at the state level in some states, but the fact remains that it is still not legal at the federal level. The feds still have the right to arrest any business that tries to get in on the selling of the product. In May 2014, the Securities and Exchange Commission (SEC) issued an investor alert about marijuana-related investments, in which it said “marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution. Nothwithstanding the federal ban, as of the date of this guidance, 20 states and the District of Columbia have legalized certain marijuana-related activity.” This week the Wall Street Journal published an article warning about the risks associated with Marijuana stocks.

Funds that specialize in marijuana-related securities such as the High Times Growth Fund and Marijuana Investment Co., are not public, and are currently open only to accredited investors, although Marijuana Investment Co is planning to file for an initial public offering. Mutual funds and exchange-traded funds will be looking into marijuana-related businesses soon. Says Alan Brochstein, a financial adviser who runs the newsletter “420 Investor,” “I don’t think there will be funds and ETFs in the cannabis sector for at least a couple of years. Liquidity in this space is poor, so mostly you have over-the-counter stocks trading publicly.” Legal sales of marijuana are expected to quintuple to as much as $8 billion in 2019 from $1.6 billion in 2013, according to Marijuana Business Daily.

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