Wall Street is constantly crafting complex and volatile products that somehow end up in the investment accounts on Main Street. The latest turbulence in the stock markets has already been in part attributed to one of the latest Wall Street machinations: exchange-traded-products (ETPs) linked to volatile exchanges – specifically, products linked to the Chicago Board Options Exchange (CBOE) Volatile Index (VIX). Today alone, the Dow Jones Industrial Average closed more than 1000 points down from yesterday, and due to the volatility that is still ongoing, the devastating fallout is largely unrealized and has left investors scrambling.
Since its inception in 1993, the VIX was one of the earlier attempts to create an index that broadly measured volatility in the market. One such ETP linked to the VIX is Credit Suisse’s VelocityShares Daily Inverse VIX Short-Term ETN (ticker symbol XIV), which the issuer just announced it will be shutting down after losing most of its value earlier this week. Products that may be at similar risk include Proshares SVXY, VelocityShares ZIV, iPATH XXV, and REX VolMaxx VMIN. But the risks associated with these ETPs have been well known to professionals in the securities industry, and investors who were recommended these products should have received a complete and balanced disclosure of these risks at the time of purchase.
In October of 2017, the Financial Industry Regulatory Authority (FINRA) ordered Wells Fargo to pay $3.4 million in restitution to investors relating to unsuitable recommendations of volatility-linked ETPs. FINRA also published a warning to other firms in Regulatory Notice 17-32 regarding sales practice obligations, stating that “many volatility-linked ETPs are highly likely to lose value over time” and “may be unsuitable to retail investors, particularly those who plan to use them as traditional buy-and-hold investments.” This was not the first warning from the regulator.