FINRA Orders Broker to Pay More Than $700,000 in Restitution For Selling Unsuitable ETFs and Engaging in Excessive Trading of Mutual Funds


On December 5, 2013, the Financial Industry Regulatory Authority (FINRA) announced that it has ordered broker-dealer J.P. Turner & Company, L.L.C. to pay $707,559 in restitution to dozens of customers in connection with its sale of unsuitable leveraged and inverse exchange-traded funds (ETFs) and for “excessive mutual fund switches.”

According to Brad Bennett, FINRA Executive Vice President and Chief of Enforcement:

“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. Firms also have a fundamental obligation to monitor conservative investments such as mutual funds to ensure that investors are not abused by excessive trading.”

According to FINRA’s press release: “Leveraged and inverse ETFs “reset” daily, meaning that they are designed to achieve their stated objectives on a daily basis so their performance can quickly diverge from the performance of the underlying index or benchmark. It is possible that investors could suffer significant losses even if the long-term performance of the index showed a gain. This effect can be magnified in volatile markets.”

FINRA reportedly found that the brokerage firm failed to establish and maintain a reasonable supervisory system and instead, supervised leveraged and inverse ETFs in the same manner that it supervised traditional ETFs.  It also concluded that the firm failed to provide adequate training regarding these ETFs. In addition, the firm was found to have allowed its registered representatives to recommend these complex ETFs without first performing reasonable diligence to understand the risks and features associated with the products. FINRA also reportedly found that the brokerage firm failed to reasonably determine whether the ETFs were suitable for several clients.  As a result, FINRA determined that several customers suffered losses.

In addition, FINRA reportedly found that the firm engaged in “a pattern of unsuitable mutual fund switching.”  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 trends or patterns involving mutual fund switches.”  According to FINRA, customers paid several hundred thousand dollars in commissions and sales charges in unsuitable mutual fund switches.  J.P. Turner neither admitted nor denied the charges, but reportedly consented to the entry of FINRA’s findings.

Vincent D. Slavens practices in the area of FINRA arbitrations representing investors against broker-dealers and investment advisers.  He can be reached @ or (619) 232-0331 xt 11.