Finra on Wednesday ordered midsize independent broker-dealer J.P Turner & Co. to pay more than $700,000 in restitution to clients who complained about unsuitable sales of leveraged and inverse exchange-traded funds and excessive mutual fund switching by one registered representative.
The Financial Industry Regulatory Authority Inc. found that J.P. Turner, with 421 registered reps, failed to adequately supervise the sales of leveraged and inverse ETFs, potentially highly volatile products, between January 2008 and August 2009. Instead, the firm supervised sales of the specialized ETFs in the same manner that it supervised sales of traditional ETFs.
The firm also failed to determine whether the risky ETFs were suitable for at least 27 customers, including retirees and conservative clients, who sustained collective net losses of more than $200,000, according to Finra.
During that time frame, J.P. Turner customers bought and sold $185 million of nontraditional ETFs, which offer leverage or are designed to perform inversely to the index or benchmark they track. Such ETFs aren't typical “buy and hold” investments and are designed to be traded frequently.
In addition, one J.P Turner broker, identified only as “LG,” from February 2008 through April 2010 engaged in a pattern of unsuitable mutual fund switching, according to the same Finra letter of acceptance, waiver and consent.
On 537 occasions, the broker recommended that clients sell mutual funds within only one to 12 months after buying them, according to Finra.
Sixty-six clients paid $445,000 in commissions and sales charges of $57,000, according to Finra.
The firm failed to establish and maintain a reasonable supervisory system designed to prevent unsuitable mutual fund switching and lacked sufficient procedures to adequately monitor for patterns involving mutual fund switches, according to Finra.
J.P. Turner wasn't fined in the matter.
In the settlement, J.P. Turner neither admitted nor denied Finra's charges.
“We are pleased to have a resolution to this matter and have it behind us,” company spokeswoman Heidi Wheatley wrote in an e-mail.
“The related activity took place years ago, and the firm has discontinued offering leveraged ETFs and significantly enhanced its policies and procedures related to mutual fund activity,” she wrote, adding that the broker was fired because of this activity.
Securities regulators have been warning the industry about the sales of leveraged and inverse ETFs for several years.
For example, Finra issued a notice to members in June 2009 regarding firm's obligations to monitor sales practice of such ETFs.