Dec 5 An Atlanta-based securities brokerage must pay back a total of more than $700,000 to 84 customers for selling them risky types of exchange-traded funds and frequently switching clients' mutual funds to boost commissions, Wall Street's industry-funded watchdog said on Thursday.
The Financial Industry Regulatory Authority (FINRA) found J.P. Turner & Co LLC allowed its brokers to recommend leveraged and inverse exchange-traded funds (ETFs) during 2008-2009 without adequate training or understanding the risks the ETFs posed to investors, according to a settlement. The firm also did not properly supervise sales of the securities, FINRA said.
Leveraged and inverse ETFs, unlike traditional ETFs, are designed to amplify short-term returns by using debt and derivatives and are more suitable for professional traders than for long-term retail investors. They make up only $32.7 billion of the $1.65 trillion U.S. ETF market, according to Lipper, a Thomson Reuters company.
J.P. Turner did not admit or deny FINRA's findings, according to a settlement with the regulator. The firm has since discontinued offering leveraged and inverse ETFs and has enhanced its policies and procedures related to mutual fund activities, a spokeswoman said.
The firm's customers bought and sold a total of more than $185 million in non-traditional ETFs during the period, FINRA said. At least 27 J.P. Turner customers, including retirees and those with conservative investment goals, held the securities for up to several months, losing a total of $200,000, FINRA said.
In 2009, FINRA and other regulators began issuing warnings about the sale of leveraged and inverse ETFs because they worried securities brokers were selling them to buy-and-hold investors - a strategy likely to cause heavy losses, say advisers.
Some J.P. Turner brokers also engaged in a pattern of switching their clients' mutual funds without looking into whether the funds were appropriate, given factors such as the clients' risk tolerance and ages, FINRA said.
One broker, for example, recommended on 537 occasions that customers sell mutual fund shares within only one month to a year of buying them, FINRA said. The recommendations to 66 customers generated $445,000 in commissions and $57,000 in sales charges, according to FINRA.