CAPITOL SECURITIES MANAGEMENT CENSURED AND FINED FOR FAILURE TO DELIVER PROSPECTUSES TO INVESTORS

Capitol Securities Management, a firm based in Glenn Allen, Virginia, consented to the Financial Industry Regulatory Industry's (FINRA) findings that the firm did not have written procedures covering the delivery of exchange-traded fund (ETF) or unit investment trust (UIT) prospectuses. FINRA stated that the firm entered into an agreement with a company for delivery of ETF and UIT prospectuses, but it remained the firm's responsibility to review each transaction and verify that a prospectus was properly delivered when required. Capitol Securities Management submitted a letter of acceptance, waiver, and consent and paid $25,000 to put an end to FINRA's investigation.
A prospectus is a document that discloses important information about an investment. It typically provides investors with material information about mutual funds, stocks, bonds, and other investments. Such information generally includes a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties, and any other material information. In the case of an initial public offering (IPO), a prospectus is required to be delivered by underwriters or brokerage firms to potential investors.
ETFs are investment funds that are traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index and are attractive investments because of their low costs, tax efficiency, and stock-like features. By owning an ETF, investors benefit from the diversification of an index fund as well as the ability to purchase as little as one share. In addition, expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors pay the same commission to their brokers that they would pay on any regular stock order.
UITs are one of three types of investment companies - the other two are mutual funds and closed-end funds - that offer a fixed, unmanaged portfolio, of stocks and bonds, as redeemable "units" to investors for a specific period of time. They are designed to provide capital appreciation and/or dividend income. Each unit typically costs $1,000 and can be resold in the secondary market. A UIT may be either a regulated investment corporation or a grantor trust. The former is a corporation in which the investors are joint owners, and the latter grants investors proportional ownership in the UIT's underlying securities.
In this case, FINRA found that the delivery company made available daily and monthly exception reports through its online report center to help Capitol Securities Management with its delivery obligations. The reports listed all prospectuses not delivered on a trade date and the reason each prospectus was not delivered. However, Capitol Securities Management failed to review the exception reports the company provided and failed to review or monitor the functions it delegated to the company. Therefore the firm failed to deliver the required prospectuses in connection with the ETF and UIT purchases.
Have you suffered losses in your Capitol Securities Management brokerage account? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is accepting clients with valid claims against Capitol Securities Management stockbrokers who may have engaged in misconduct and caused investors losses.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

INVESTORS NATIONWIDE BEWARE - ACTIVELY TRADED ETFS WILL ADD RISK TO YOUR PORTFOLIO!

The Securities and Exchange Commission (SEC) recently unveiled a policy change that could have a major impact on an exchange traded fund's (ETFs) risk profile. In essence, the SEC has lifted its suspension on the use of derivatives by certain ETFs. This move is in response to pressure from the industry, and it is expected to result in a major increase in the number of actively managed ETFs. Managers will now be able to use derivatives in their investment strategies in order to hedge against risk. Problem is derivatives are also widely used to speculate in order to increase profits, which most certainly increases risk. Fortunately, the SEC is keeping its freeze in place for leveraged and inverse exchange traded funds - funds that can deal a bigger blow to investors because of their use of borrowed funds to increase profits.
ETFs are investment funds that are traded on stock exchanges, much like stocks. An ETF holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day. Most ETFs track an index, such as a stock index or bond index and are attractive investments because of their low costs, tax efficiency, and stock-like features. By owning an ETF, investors benefit from the diversification of an index fund as well as the ability to purchase as little as one share. In addition, expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, investors pay the same commission to their brokers that they would pay on any regular stock order.
Investors should be concerned with the lifting of the derivatives suspension for ETFs because it will most likely affect management's investment strategy and investors' portfolios. Currently, there are 7,149 mutual funds and 1,444 ETFs. Approximately 6,836 mutual funds are actively managed, and only 54 ETFs are actively managed thus far. With expectations of a rise in actively traded ETFs, Investors and their advisors should review their ETF holdings for any changes in investment strategy and determine whether it is suitable for them. That way, investors can avoid learning the hard way what actively traded ETFs are all about and prevent future monetary losses.
Have you suffered losses resulting from actively traded ETFs? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation. Mr. Pearce is actively investigating and accepting clients with valid claims against stockbrokers who misrepresented and sold unsuitable investments such as actively traded ETFs to investors.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

ET - SYNTHETIC ETFS - GO HOME!

Synthetic ETFs are complex, very risky, require active analysis and monitoring and are not suitable for the average long-term "buy and hold" retail investor. A synthetic ETF can be a basket of investments involving stocks, bonds, commodities, currencies, options, swap contracts, swaptions, commodities futures contracts and other derivative instruments that track the performance of an underlying Index or market sector. The synthetic ETFs du jour fall in three categories: Leveraged ETFs, Inverse ETFs and Leveraged Inverse ETFs.
Leveraged ETFs use financial derivatives and debt to multiply the returns of an underlying Index. The managers of Leveraged ETFs attempt to maintain a constant amount of leverage throughout the investment at a 2:1 or 3:1 ratio. The manager's goal is to enhance the returns; if the underlying index returns 1%, the fund should theoretically return 2%. However, the leverage ratio increases the losses in a similar manner, a drop of 1% in the index would result in a 2% loss in the ETF managed on a 2:1 leverage ratio.
Inverse ETFs, also called "short" funds, use various financial derivatives to profit from a decline in the value of an underlying index. Investing in an Inverse ETF is similar to holding various short positions in order to profit from falling prices. An Inverse ETF that tracks a particular index seeks to deliver the inverse of the performance of that index. Inverse ETFs are often marketed as a way for investors to hedge their exposure in rapidly moving markets.
Leveraged Inverse ETFs, also called "ultra short" funds, seek to deliver return that is a multiple of the inverse performance of the underlying index. For example, a 2:1 leveraged inverse ETF attracts a particular index seeks to deliver double the inverse of that index's performance.
Leveraged and Inverse ETFs are intended as short-term investments. They are not meant to be held for longer periods of time. If held for more than one day, their performance can differ significantly from their stated objectives due to liquidity and other management performance issues. Leveraged and Inverse ETFs have also become the new tool of brokers seeking to turn clients' accounts to maximize their commissions. Leveraged inverse ETFs also require daily resets internally that make them less tax efficient than traditional ETFs.
Synthetic ETFs are unsuitable for most retail investors. The mantra for the long term "buy and hold" investor should be ET-Synthetic ETF-go home! If you have suffered losses investing in any Synthetic ETF then you should call the Law Offices of Robert Wayne Pearce P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT INVESTORS--EXOTIC ETFS CAN BLOW UP YOUR PORTFOLIO

Look at Morningstar's list of the 20 best-performing ETFs year-to-date. These ETFs, which have shot up between 22% and 112% so far this year, could just as quickly lose that much and more. They may be liquid, but it is no place for the average investor to be. They are all ultra-high-risk speculative ETFs that are designed for day-trading and use leverage, short-selling and derivatives to try to achieve returns, or are niche-specialty exchange traded funds. To give you an idea of what they are talking about, the top five are:

ProShares UltraShort DJ-UBS Natural Gas
Direxion Daily Nat Gas Rltd Bear 3X Shares
Direxion Daily Retail Bull 3X Shares
ProShares UltraShort DJ-UBS Crude Oil
ProShares Ultra Nasdaq Biotechnology.

And it's ultra-high risk all the way down to number 20 and beyond.

Investors who cannot afford to lose (or are unwilling to lose) every penny of their "investment" have no business buying such ETFs, and financial advisers have a legal obligation not to recommend the purchase of these kinds of ETFs to most investors. According to Morningstar, investors should "beware" of specialty ETFs and use care (to say the least) in considering leveraged ETFs.

Investors and their advisers need to be wary and skeptical of ultra-high-risk securities and misleading sales pitches that seek to entice them to invest in them. These ETFs are about gambling, not investing.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

UNITED STATES ETF INVESTORS--DON'T BE FOOLED BY THE NAME!

Many exchange-traded funds (ETFs) now on the market have misleading names. According to Carey Research, many ETFs do not invest the way their names seem to indicate.
Here are some examples:

(1) ProShares Hedge Replication (HDG) Fund - ProShares Hedge Fund Replication Fund seems like it should be geared toward replicating hedge fund strategies and performance. In actuality, the ETF apparently holds 82% of its assets in three-month U.S. Treasury Bills.

(2) iShares MSCI Emerging Markets Eastern Europe Index Fund (ESR)- Although it seems that this fund would be investing throughout eastern Europe, it actually has three-quarters of its assets allocated to Russian companies and little in the rest of Eastern Europe.

(3) iShares MSCI Pacific ex-Japan (EPP) Fund- Although it would seem that this fund invested throughout the Pacific, it actually has 65% of its holdings in Australia and a smattering in Hong Kong and Singapore.

(4) Vanguard MSCI Pacific (VPL) Fund- Although this fund also would appear to be invested throughout the Pacific, it actually has a 62% allocation to Japan and 25% to Australia.

(5) Asia Pacific ex-Japan Portfolio Fund (PAF) - Another fund that does not spread around throughout the Pacific as its name would suggest. The fund apparently has a huge stake in South Korea (36%).

(6) PIMCO Build America Bond Strategy Fund (BABZ)- Although the fund would seem to invest throughout the United States, nearly 70% of the assets are invested in bonds from four states--California, New York, Illinois and New Jersey--that have budget problems and issue more bonds than most.

(7) United States Oil Fund (USO)- Although this fund was designed to follow WTI crude oil prices, investors can find their assets going in the opposite direction from crude oil prices because the fund does not actually hold any oil. Instead, it maintains positions on the futures markets.

(8) United States Natural Gas Fund (UNG) - Another fund that actually holds futures contracts as opposed to natural gas.

The Carey Research conclusions touch on a problem in the securities industry today. Many offerings currently out there, in particular structured products, ETFs, and ETNs created by the industry, do not invest the way their name suggests. Many of these investments are packaged as a way for investors to avoid the volatility of the market or capture growth in a particular sector. In reality, these structured investments are just ways for the industry to increase revenues generated from the creation, sale, and management of these products.

If you have experienced losses in any of these investments and feel the financial advisor that sold the product misrepresented the investment strategy or failed to perform due diligence on the actual underlying assets in the fund, you may be able to recover your losses in a FINRA arbitration claim.

Brokerage firms have a fiduciary duty to research investments and to ensure that the investments are appropriate for you in light of your age, investment experience, net worth, and investment objectives.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WATCH OUT FLORIDA INVESTORS--JUNK BOND ETFS THROUGHOUT THE UNITED STATES HAVE HIDDEN RISKS!

Wall Street Journal columnist Jason Zweig is warning junk bond enthusiasts to think twice before investing in junk bonds, especially junk bond exchange traded funds. In addition to the junk bonds themselves being overbought, the exchange traded funds that own them trade at a premium over the net asset value of the junk bonds. When you add the expense ratio to the premium, investors are now paying 2 percent more than the current value of the bonds. All of this means that, if investors start to dump junk bonds, the ETFs will decline about three times more than the underlying bonds. "'Junk' ETFs: Tread Lightly," Wall Street Journal).

"ETFs have their known costs and benefits. And this is one of their costs," Oleg Melentyev, head of high-yield corporate strategy at Bank of America Merrill Lynch, was quoted as saying.

The extremely low interest rate environment has hurt older Americans on fixed incomes who need their investments to produce income to meet their obligations. They are understandably seeking higher yields, and are often told that higher yields are available without incurring higher risk. As Mr. Zweig put it, however, investors considering such an alternative should "give it the sniff test, so you don't end up with a smelly surprise." Advisors should likewise be very careful to explain the risks as well as the benefits of a higher yield investment strategy.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

FINRA WILL FILE ENFORCEMENT ACTIONS FOR IMPROPER SALES OF ETFS AND ETNS THROUGHOUT FLORIDA AND THE UNITED STATES!

The Financial Industry Regulatory Authority (FINRA) announced plans to file enforcement actions against certain brokerages in connection with unsuitable sales of leveraged and inverse leveraged exchange-traded funds (ETFs), as well as for failure to train their brokers who sell them (see Reuters article by Suzanne Barlyn and Jessica Toonkel entitled "FINRA to bring cases over leveraged, inverse ETFs"). The article cites FINRA enforcement chief Bradley Bennett as the source of this information, and notes that he refused to identify the broker-dealers that FINRA plans to sue.

Bennett reportedly told lawyers at a Practising Law Institute (PLI) seminar in New York that the enforcement actions will "make statements" about how broker-dealers should ensure that registered representatives are properly trained about these complex products and the types of customers for whom they may or may not be suitable.

Leveraged and inverse exchange traded funds are designed to magnify short-term returns of a fund's underlying assets by a factor of 2 or more. They employ derivatives and are generally considered to be unsuitable for ordinary buy-and-hold investors.

FINRA is concerned that brokers are selling these products to long-term retail investors, despite their unsuitability for those investors. FINRA is also concerned that the selling brokers are not properly trained and do not explain the risks of these ETFs to potential purchasers.

"We don't have a qualm with the product," Bennett was quoted as saying, adding: "We just want to make sure that people who are selling them understand them." If brokers do not understand them, they cannot explain to customers how they work or what the risks are.

Leveraged and inverse ETFs have long been on regulators "worry list," but enforcement actions have been rare. In July 2011, the Massachusetts Securities Division filed an enforcement action against RBC Capital Markets LLC and one of its brokers for selling leveraged ETFs to clients who did not understand them. Similarly, in March, FINRA barred a former Morgan Keegan broker for making excessive and inappropriate leveraged and inverse ETF trading in clients' accounts.

Exchange traded notes (ETNs) are also on FINRA's radar screen. FINRA is reportedly examining how firms market and sell them. Last month, Credit Suisse's VelocityShares Daily 2x Short-Term exchange-traded note lost half its value in just two days. FINRA hopes to get "ahead of the curve" before that happens to other investors, according to Bennett.

"Most people agree certain investor protections are required" in this area, Paul Justice, an ETF analyst at Morningstar, was quoted as saying. BlackRock Inc., the world's largest ETF manager, has urged regulators and legislators to require investment firms to clearly explain to investors the risks involving complex ETFs and ETNs.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

FINRA FINES MORGAN STANLEY, CITIGROUP, WELLS FARGO, AND UBS $9.1M OVER LEVERAGED AND INVERSE ETFS

Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS), and Citigroup Inc. (C) have consented to pay a combined $9.1 million to settle Financial Industry Regulatory Authority claims that they did not adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009. $7.3 million of this is fines. The remaining $1.8 million will go to affected customers. The SRO says that the four financial firms had no reasonable grounds for recommending these securities to the investors, yet they each sold billions of dollars of ETFs to clients. Some of these investors ended up holding them for extended periods while the markets were exhibiting volatility.

It was in June 2009 that FINRA cautioned brokers that long-term investors and leveraged and inverse ETFs were not a good match. While UBS suspended its sale of these ETFs after the SRO issued its warning, it eventually resumed selling them but doesn't recommend them to clients anymore. Morgan Stanley also had announced that it would place restrictions on ETF sales. Meantime, Wells Fargo continues to sell leveraged and inverse ETFs. However, a spokesperson for the financial firm says that it has implemented enhanced procedures and policies to ensure that it meets its regulatory responsibilities. Citigroup also has enhanced its policies, procedures, and training related to the sale of these ETFs. (FINRA began looking into how leveraged and inverse ETFs are being marketed to clients in March after one ETN, VelocityShares Daily 2x VIX Short-Term (TVIX), which is managed by Credit Suisse (CS), lost half its worth in two days.)

The Securities and Exchange Commission describes ETFs as (usually) registered investment companies with shares that represent an interest in a portfolio with securities that track an underlying index or benchmark. While leveraged ETFs look to deliver multiples of the performance of the benchmark or index they are tracking, inverse ETFs seek to do the opposite. Both types of ETFs seek to do this with the help of different investment strategies involving future contracts, swaps, and other derivative instruments. The majority of leveraged and inverse ETFs "reset" daily. How they perform over extend time periods can differ from how well their benchmark or underlying index does during the same duration. Per Bloomberg, leveraged and inverse ETFs hold $29.3 billion in the US.

For investors, it is important that they understand the risks involved in leveraged and inverse ETFs. Depending on what investment strategies the ETF employs, the risks may vary. Long-term investors should be especially careful about their decision to invest in leveraged and inverse ETFs.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.