J.P. Turner & Co., LLC (J.P. Turner) was ordered by the Financial Industry Regulatory Authority (FINRA) to pay over $700,000 in restitution to more than 80 customers for sales of unsuitable leveraged and inverse exchange-traded funds (ETFs) and for excessive mutual fund switches by its registered representatives. This was just the tip of the iceberg and undoubtedly many more J.P. Turner customers have suffered from these unlawful sales practices.
Leveraged and inverse ETF's are highly complex and risky investments. According to Brad Bennett, FINRA's Chief Enforcement Officer, "Registered representatives 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 recommended by their registered representatives."
Leveraged and inverse ETF's are short-term investments. Investors who buy and hold them probably do not understand the nature, mechanics and risks of these investments. They "reset" daily, meaning they are designed to achieve their objectives on a daily basis and their performance can quickly diverge from the performance of the underlying Index or benchmark. Investors who purchased these ETFs for the long term can suffer significant losses even if the long-term performance of the Index showed a sizable gain. In volatile markets, the losses on a daily basis can be extreme.
FINRA alleged that J.P. Turner did not have the necessary supervisory practices and procedures in place for leveraged and inverse ETF's. They cannot be supervised the same way as traditional ETFs. FINRA found that J.P. Turner's registered representatives were not properly trained to understand the nature and risks of these investments. The regulatory agency determined that J.P. Turner allowed it's salesmen to recommend these complex products without performing reasonable due diligence. Many J.P. Turner customers purchased and held leveraged and inverse ETF's for many months which was inappropriate.
In the course of FINRA's investigation, it also discovered an unacceptable pattern of unsuitable mutual fund switching in clients' accounts at J. P. Turner. Unlike leveraged and inverse ETF's, mutual fund shares are typically held as long-term investments and are not proper vehicles for short-term trading because of the high transaction costs. FINRA alleged that J.P. Turner had an insufficient supervisory system designed to prevent such unsuitable mutual fund switching and lacked procedures to monitor such excessive trading in mutual funds. According to FINRA, there were more than 2800 mutual fund switches resulting in excessive commissions and sales charges.
Of course J.P. Turner did not admit nor deny the charges but nevertheless consented to the entry of FINRA's findings. But this is not the first time that J.P. Turner has been sanctioned by FINRA. There are over 21 regulatory events and 12 customer arbitration complaints reported against J.P. Turner. Make sure you investigate the firm and it's representative thoroughly before you transact any business with any broker-dealer.
Broker-dealers must establish and implement a reasonable supervisory system to protect customers from broker misconduct. If broker-dealers do not establish and implement these protective measures, they may be liable to investors for damages flowing from the misconduct. Therefore, investors who have suffered losses stemming from unsuitable recommendations, material misrepresentations, omissions, and/or other fraudulent activity by their broker can bring forth claims to recover damages against broker-dealers like J.P. Turner, which should consistently oversee its employees' activities in order to prevent the above-described prohibited conduct.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. Please see our Instablog profile (left column) for ways to contact us and get answers to any of your questions about this blog post and/or any related matter.