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Big Banks Fined $9 Million Over Risky Products
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Big Banks Fined $9 Million Over Risky Products

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Big Banks Fined $9 Million Over Risky Products

Four of the nation's biggest banks were sanctioned on Tuesday over failing to supervise the sale of risky products to retail investors.

The banks -- Citigroup, Morgan Stanley, UBS and Wells Fargo -- agreed to pay regulatory fines of more than $9 million to settle cases tied to exchange-traded funds.

The Financial Industry Regulatory Authority, Wall Street's self-regulator, accused the firms of failing to monitor the sale of so-called leveraged and inverse exchange-traded funds, risky variations on the common products, without a "reasonable basis" for recommending the securities.

"The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers," J. Bradley Bennett, Finra's enforcement chief, said in a statement. "Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

The regulator is close to bringing other cases related to whether E.T.F.'s were suitably marketed to investors, a person briefed on the matter said.

Wells Fargo faced the largest fine of the group, paying $2.1 million. The banks neither admitted nor denied the accusations, but consented to the entry of the regulator's findings.

Exchange-traded funds have been heating up in recent years, moving from obscurity to prominence on Wall Street. The funds allow investors and financial firms to track a basket of stocks or commodities -- or an underlying benchmark like the Standard & Poor's 500-stock index -- through a single security.

Inverse funds allow investors to short an index, or bet against its performance, while leveraged funds enable investors to use debt and derivatives to enhance the performance. The complex instruments carry steeper risks than the plain vanilla exchange-traded-fund.

But from January 2008 through June 2009, a tumultuous time for the markets amid the financial crisis, the banks sold billions of dollars of these products to customers. The banks, according to the regulatory authority, did not sufficiently conduct due diligence about the various risks attached to the inverse and leveraged E.T.F.'s.

Brokerage firms are subject to a "suitability" standard, a legal requirement that they offer products that are appropriate but not necessarily in the best interests of their clients. In some cases, the regulator found that the four banks made "unsuitable" recommendations of the products to customers with conservative investment objectives.


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