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Thursday, December 05, 2013

Crying Foul Over "Excessive Mutual Fund Switches" and More, Finra Orders a B-D to Return More than $700K

Reported by Neil Anderson, Managing Editor

Finra just smited a broker-dealer to the tune of $707,559 over leverage and inverse ETF use and "excessive mutual fund switches."

Today the regulatory agency revealed its order to Atlanta-based B-D J.P. Turner & Company. The order requires the B-D to return the money to 84 customers, though the order does not include a fine. According to Finra, J.P. Turner's customers lost more than $200,000 thanks to the leveraged and inverse ETFs and more than $500,000 thanks to mutual fund switching.

According to Finra, "in settling this matter, J.P. Turner neither admitted nor denied the charges, but consented to the entry of Finra's findings."

"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," stated Brad Bennett, Finra executive vice president and chief of enforcement. "Firms also have a fundamental obligation to monitor conservative investments such as mutual funds to ensure that investors are not abused by excessive trading."

Finra has been publicly worrying about leveraged and inverse ETFs for years. In June 2009 the agency warned that such ETFs "typically are unsuitable for retail investors for plan to hold them for longer than one trading session, particularly in volatile markets", and Finra and the SEC followed up in August 2009 with an "Investor Alert" along the same lines. Fast forward to spring 2012, when Finra fined three wirehouses (and a former wirehouse parent) millions and ordered them to pay back millions more in restitution. And later in 2012 Finra another advisory shop to pay back millions in a similar case.


Press Release

FINRA Orders J.P. Turner to Pay More Than $700,000 in Restitution for Unsuitable Sales of Leveraged and Inverse ETFs and for Excessive Mutual Fund Switching

WASHINGTON The Financial Industry Regulatory Authority (FINRA) today announced that it has ordered Atlanta-based broker-dealer J.P. Turner & Company, L.L.C. to pay $707,559 in restitution to 84 customers for sales of unsuitable leveraged and inverse exchange-traded funds (ETFs) and for excessive mutual fund switches.

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said, "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 J.P. 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, J.P. 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 J.P. Turner customers held leveraged and inverse ETFs for several months. J.P. 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 $200,000.

In addition, J.P. 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. J.P. 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, J.P. 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 $500,000 in unsuitable mutual fund switches.

In settling this matter, J.P. Turner neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

FINRA's investigation was conducted by the departments of Enforcement and Member Regulation.

Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2012, members of the public used this service to conduct 14.6 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.

FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, informing and educating the investing public, providing trade reporting and other industry utilities, and administering the largest dispute resolution forum for investors and firms. For more information, please visit www.finra.org.
 

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