Two law firms weigh class action over sales of non-typical ETFs

Two law firms are investigating potential claims on behalf of retail investors who purchased leveraged, inverse and leveraged-inverse exchange traded funds and held them in their brokerage accounts for longer than one day.

The investigation — by Stanley Mandel & Iola LLP of Dallas and Wolf Haldenstein Adler Freeman & Herz LLP of New York — covers all such ETFs from providers including ProShare Advisors LLC of Bethesda, Md., Direxion Funds of Newton, Mass., and Rydex SGI of Rockville, Md.

The potential class action is based on the belief that leveraged and inverse ETFs are suitable only for professional investors and should be held for no longer than one trading day.

It was a belief espoused by the Financial Industry Regulatory Authority Inc., which warned brokers in June that inverse and leveraged ETFs “typically are unsuitable for retail investors” who hold them longer than that.

Finra of New York and Washington clarified its position on such ETFs in a podcast July 13 in which it said member firms could recommend that a retail investor hold them for longer than one day, provided a suitability assessment is conducted with respect to such an investor and the ETF.

If a lawsuit results, it will be the first potentially to involve multiple providers of leveraged and inverse ETFs.

Complaints seeking class action status are currently pending in the U.S. District Court for the Southern District of New York against ProShare Advisors, the largest provider of such ETFs, alleging that it filed to disclose the risks inherent in its ProShares UltraShort Real Estate Fund (SRS), a leveraged-inverse ETF.

The allegations are “without merit,” the company said in a statement.