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
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
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.