Mika Meyers PLC has initiated FINRA arbitration proceedings against Regal Securities, Inc. (CRD #7297, Glenview, Illinois) on behalf of a group of investors who suffered millions in losses as a result of holding long-term positions in non-traditional ETFs.
The investors allege that Regal’s recommendation of leveraged and inverse leveraged ETFs as part of a buy-and-hold strategy was fundamentally unsuitable as these investments are specifically designed for use in intra-day trading and can quickly depreciate in value if held beyond a single trading session, especially in volatile markets. The investors further allege that Regal disregarded or overlooked FINRA’s admonition to its member firms in FINRA Regulatory Notice 09-31 that “inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.”
The following table shows the holding periods and net-out-of-pocket losses (NOP Losses) associated with the non-traditional ETFs that were held in one of the accounts at issue.
| Example Account | |||
|
Security |
Amount Invested |
Days Held |
NOP Losses |
| Direxion Shs Daily Financial Bear 3X ETF (FAZ) | $68,560 | 981 | $58,315 |
| Proshares Ultrashort Barclays 20+ Year Treasury ETF (TBT) | $272,475 | 1508 | $88,785 |
| Proshares Ultrashort FTSE China 25 2X ETF (FXP) | $8,472 | 981 | $5,026 |
| Proshares Ultrashort Real Estate 2X ETF (SRS) | $24,090 | 994 | $12,663 |
| Proshares Ultrashort Semiconductors 2X ETF (SSG) | $38,645 | 871 | $25,778 |
| Proshares Tr II Ultra VIX Short Term Futures 2X ETF (UVXY) | $212,523 | 737 | $116,036 |
| Total NOP Losses – $306,603 | |||
It is well established that brokerage firms like Regal have an affirmative duty to warn their customers about significant risks associated with their investments. See, e.g., Leib v Merrill Lynch, Pierce Fenner & Smith, Inc, 461 F Supp 95 1 (ED Mich 1978), aff’d, 647 F2d 165 (6th Cir 1981) (recognizing that brokers have a duty to warn); Quick & Reilly, Inc v Walker, 930 F2d 29 (9th Cir. 1991) (same); see also Memphis Housing Auth v Paine, Webber, Jackson & Curtis, Inc., 639 F Supp 108 (WD Tenn 1986) (denying the defendant’s motion for summary judgment, where the plaintiff claimed the broker breached a duty to warn the plaintiff’s employee of the risks of speculative trading). FINRA has specifically stated with respect to non-traditional ETFs that “it is important that members . . . make every effort to make customers aware of the pertinent information regarding the products.” FINRA Non-Traditional ETFs FAQ.
If you have suffered investment losses through unsuitable investments in non-traditional ETFs, call Mika Meyers PLC now for a free telephone consultation.