The products were incorrectly recommended for buy-and-hold strategies
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Wells Fargo has agreed to compensate customers whom it advised to use volatility-linked exchange-traded products without knowing the risks involved.
The Financial Industry Regulatory Authority (FINRA) has ordered one of the bank’s brokerage divisions, which has advisors across the US, to provide US$3.4 million in compensation for improper recommendations of the products made from July 2010 to May 2012, reported the Wall Street Journal.
In a statement released Monday, the regulator said certain representatives of the bank mistakenly believed that the products could serve as a long-term hedge to protect clients in case of a downturn in the US equity markets. FINRA noted that volatility ETPs are appropriate for short-term trades and should not be used in buy-and-hold strategies as they can lose significant value over time.
Introduced in 2009, volatility ETPs are linked to the CBOE Volatility Index, otherwise known as the VIX. The products have become increasingly popular among institutions and individuals alike; according to the Journal, the iPath S&P 500 VIX Short-Term Futures Exchange-Traded Note, or VXX, is one of the most traded securities in the US stock market.
A spokeswoman for Wells Fargo said that the claims have been settled with FINRA. The bank has also reportedly stopped offering certain volatility ETPs in retail brokerage accounts. Aside from the VXX, Wells Fargo has removed the iPath S&P 500 VIX Mid-Term Futures Exchange-Traded Note and the ProShares VIX Short-Term Futures Exchange-Traded Fund, which have declined by more than 40% and roughly 65% so far this year, respectively.
This is the first case from FINRA relating to volatility ETPs, but not the first time it penalized Wells Fargo for ETP-related violations. In 2012, the regulator ordered the bank to pay a US$2-million fine, as well as US$600,000 in compensation to customers, for breaches involving leveraged, inverse, and inverse-leveraged products.
For more of Wealth Professional's latest industry news, click here.
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The Financial Industry Regulatory Authority (FINRA) has ordered one of the bank’s brokerage divisions, which has advisors across the US, to provide US$3.4 million in compensation for improper recommendations of the products made from July 2010 to May 2012, reported the Wall Street Journal.
In a statement released Monday, the regulator said certain representatives of the bank mistakenly believed that the products could serve as a long-term hedge to protect clients in case of a downturn in the US equity markets. FINRA noted that volatility ETPs are appropriate for short-term trades and should not be used in buy-and-hold strategies as they can lose significant value over time.
Introduced in 2009, volatility ETPs are linked to the CBOE Volatility Index, otherwise known as the VIX. The products have become increasingly popular among institutions and individuals alike; according to the Journal, the iPath S&P 500 VIX Short-Term Futures Exchange-Traded Note, or VXX, is one of the most traded securities in the US stock market.
A spokeswoman for Wells Fargo said that the claims have been settled with FINRA. The bank has also reportedly stopped offering certain volatility ETPs in retail brokerage accounts. Aside from the VXX, Wells Fargo has removed the iPath S&P 500 VIX Mid-Term Futures Exchange-Traded Note and the ProShares VIX Short-Term Futures Exchange-Traded Fund, which have declined by more than 40% and roughly 65% so far this year, respectively.
This is the first case from FINRA relating to volatility ETPs, but not the first time it penalized Wells Fargo for ETP-related violations. In 2012, the regulator ordered the bank to pay a US$2-million fine, as well as US$600,000 in compensation to customers, for breaches involving leveraged, inverse, and inverse-leveraged products.
For more of Wealth Professional's latest industry news, click here.
Related stories:
Canadian ETF industry hits new heights
Are ETFs just fair-weather funds?
