Independent broker-dealer J.P. Turner & Co. has been ordered to pay $707,559 in restitution to 84 affected individuals over unsuitable ETF sales, according to FINRA.
The regulatory authority says Atlanta-based J.P. Turner -- which ranked No. 59 on Financial Planning's annual list of independent B-Ds -- generated $500,000 in improper mutual fund sales commissions and caused net losses to its customers of $200,000.
We are pleased to have a resolution to this matter and have it behind us, J.P. Turner said in a statement provided by chief marketing officer Heidi Wheatley. 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.
J.P Turner did not fully understand the complexity of the products it was selling, Brad Bennett, FINRAs executive vice president and chief of enforcement, indicated in a statement.
"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, according to Bennett. 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 found that J.P. Turner used the same supervisory approach to oversee its leveraged and inverse ETFs that it used to supervise traditional ETFs. Leveraged and inverse ETFs are designed to achieve their stated objectives on a daily basis, and reset daily, according to the FINRA statement -- so their performance can quickly diverge from the performance of the underlying index or benchmark. In such cases, FINRA says, investors could suffer significant losses even if the long-term performance of the index showed a gain -- an effect that can be magnified in volatile markets.
FINRA found that the firm also failed to provide adequate training regarding these ETFs.
J.P. Turner also allowed its registered representatives to recommend complex ETFs without taking the time to understand the risks and features associated with the products, the authority found.
In particular, J.P. Turner also failed to determine whether the ETFs were suitable for at least 27 customers, including retirees and conservative customers, who collectively sustained the net losses of more than $200,000.
MUTUAL FUND SWITCHING
Separately, FINRA found that 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, according to FINRA.
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, the authority found.
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, FINRAs investigation found. As a result, 66 customers paid commissions and sales charges of more than $500,000 in unsuitable mutual fund switches, according to the FINRA statement.
In settling this matter, J.P. Turner neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Like any responsible organization, J.P. Turner added in its statement, we have taken strong measures to ensure that this type of activity is not repeated. We will not allow these events to stand in the way of our commitment to our clients, advisors, and employees.
In May of last year, FINRA sanctioned four firms for $9.1 million for similar violations regarding the sales of leveraged and inverse ETFs. And earlier this year, a FINRA spokeswoman noted, the authority highlighted the issue in its examination priorities letter to firms.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access