Dimond Kaplan & Rothstein has filed an arbitration claim with the US Financial and Regulatory Authority (Finra) against Florida-based Newbridge Securities Corp on behalf of a Texas couple who lost a large portion of their life savings in 'risky' exchange-traded products (ETPs). The timing of this case coincides with recent stock-market volatility that caused large losses in certain exchange-traded funds (ETFs) and notes (ETNs), including the Proshares Short Vix Short-Term Futures (SVXY) and Credit Suisse Velocityshares Daily Inverse Vix ST ETN (XIV).

The investors allege that Matt Neas, a broker at Newbridge Securities recommended that they place nearly the entirety of their savings in 'unsuitably risky ETFs, including leveraged ETFs, short ETFs, and ETFs tied to the Vix (the S&P volatility index)', according to the filing. 'When held for longer periods, the performance of the ETFs can deviate significantly from the performance of the ETFs' benchmarks,' stated the filing. 'Many investors do not understand this feature and many brokers either do not understand it or fail to properly inform investors about the nature of the ETFs.'

Neas has been the subject of numerous prior customer complaints and recently was barred permanently from working in the securities industry after he failed to cooperate with a Finra investigation, according to the filling.

The complaint follows Switzerland's Financial Market Supervisory Authority (Finma) contact with Credit Suisse regarding the Velocityshares ETN, launched in 2010. Credit Suisse close down the ETN on February 21, after announcing, on February 6, that it had not experienced trading losses from the due December 4, 2030 ETNs.

Nomura Europe Finance also issued a statement last week (February 8) after receiving inquiries from individual investors in its US$300m Vix-linked ETN following its decision to redeem the '2049 Next Notes S&P 500 Vix Inverse ETN' on February 19 at a 96% discount after the recent stock market swings wiped out investors. 'We sincerely apologise for causing significant difficulties to investors,' said Nomura Europe Finance in a statement.

The ETN would be redeemed at 1,144 Japanese yen per unit, Nomura said, a 96% loss to holders: it was valued at 1.3bn yen on the Tokyo exchange on February 7, down from 32bn yen on February 6. Both products held clauses, which meant severe one-day losses could result in delisting.

Credit Suisse and Nomura are in danger of facing mis-selling claims after the closure and suspension of Vix-linked ETNs following the global sell-off last week, according to RPC, a legal advisory firm. “The holders of these notes are known to include a number of sophisticated institutions taking large positions, but under them are a whole raft of unidentified investors with small exposures,” said Simon Hart, partner at RPC's banking litigation team. The fact the products have opened up - because of the ‘exchange-traded nature’ of the products - beyond sophisticated/ professional investors, to a wider range of potential investors such as high net worth individuals and private investment offices, leaves them vulnerable to two key liability risks, according to RPC. “First, against the issuing banks, if the structures were deficient or the close out improperly executed,” said Hart. “Second, potential mis-selling claims by private investors if the risks of these specialised products were not properly explained by advisors or in the disclosures to market.”

Securities regulators have issued a number of reminders to brokerage companies regarding the daily nature of the ETFs and that leveraged and inverse ETFs. 'Due to the complexity of these securities, many Wall Street brokerage firms prohibit solicited sales of leveraged and inverse ETFs to retail customers,' stated the filing. 'Newbridge appears to have ignored regulators' warnings.'

In October 2017, Finra issued Regulatory Notice 17-32 in light of the unique features and risks of volatility-linked ETPs, to remind companies of their sales practice obligations relating to these products. The regulator encouraged member companies to review the guidance about volatility-linked ETPs, and reminded them of earlier guidance about heightened supervision of complex products set forth in Regulatory Notice 12-03, which includes structured notes with principal protection, as well as range accrual, steepeners, worst-of and reverse convertibles payoff types.

There are over 800 structured products linked to the CBOE SPX Volatility index, of which 776 are still live products, according to SRP data: three of these are marketed by Barclays in the US and linked to S&P Vix indices, with two based on the S&P 500 Vix Mid-Term Futures Index ER and one the S&P 500 Vix Short-Term Futures Index ER, according to SRP data.

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US watchdog targets vol-linked products, fines Wells Fargo