Mon, 09/12/2013 - 06:03
The Financial Industry Regulatory Authority (FINRA) has ordered Atlanta-based broker-dealer JP Turner & Company to pay USD707,559 in restitution to 84 customers for sales of unsuitable leveraged and inverse exchange-traded funds and for excessive mutual fund switches.
Brad Bennett, FINRA executive vice president and chief of enforcement, says: "Securities firms and their registered reps must understand the complex products they are selling and the risks inherent to the products and be able to determine if they are suitable for investors before recommending them to retail customers. Firms also have a fundamental obligation to monitor conservative investments such as mutual funds to ensure that investors are not abused by excessive trading."
Leveraged and inverse ETFs "reset" daily, meaning that they are designed to achieve their stated objectives on a daily basis so their performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets.
FINRA found that JP Turner failed to establish and maintain a reasonable supervisory system and instead, supervised leveraged and inverse ETFs in the same manner that it supervised traditional ETFs. The firm also failed to provide adequate training regarding these ETFs. In addition, JP Turner allowed its registered representatives to recommend these complex ETFs without performing reasonable diligence to understand the risks and features associated with the products. As a result, many JP Turner customers held leveraged and inverse ETFs for several months.
JP Turner also failed to determine whether the ETFs were suitable for at least 27 customers, including retirees and conservative customers, who sustained collective net losses of more than USD200,000 . In addition, JP Turner engaged in a pattern of unsuitable mutual fund switching. Mutual fund shares are typically suitable as long-term investments and are not proper vehicles for short-term trading because of the transaction fees and commissions incurred from repeated buying and selling of mutual fund shares.
JP Turner failed to establish and maintain a reasonable supervisory system designed to prevent unsuitable mutual fund switching and lacked sufficient procedures to adequately monitor for trends or patterns involving mutual fund switches.
During the relevant period, despite the presence of several red flags, JP Turner failed to reject any of the more than 2,800 mutual fund switches that appeared on the firm’s switch exception reports. As a result, 66 customers paid commissions and sales charges of more than USD500,000 in unsuitable mutual fund switches. In settling this matter, JP Turner neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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