Brokerage Fined $700,000+ for Misuse of Non-Traditional ETFs

The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Atlanta-based brokerage firm J.P. Turner & Company, L.L.C. more than $700,000 for the alleged misuse and unsuitable recommendation and sale of complex securities products called non-traditional ETFs to customers who had no business holding these products. According to FINRA’s press release, JP Turner brokers also allegedly engaged in excessive mutual fund switches, which involves using mutual fund products designed for long-term use on a short-term basis in order to generate illegitimate trading fees.

In our many successful cases dealing with customers who have suffered losses due to the misuse and abuse of non-traditional ETFs, we have found that investors rarely understand what a non-traditional ETF actually is or how it works. What’s more, very few brokers actually understand non-traditional ETFs! Which is probably why in 2009 FINRA also issued one of its regular “Investor Alerts” about perils of investing in non-traditional ETFs--for brokers and clients.

Photo by Rafael Matsunaga, Creative Commons

Traditional ETFs are defined by FINRA as “registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.” Non-traditional ETFs like those at issue in the case against J.P. Turner & Company generally come in two forms: leveraged and inverse. Leveraged ETFs offer returns at a multiple (often 2X or 3X) whatever benchmark they track. Inverse ETFs act the way they sound: they offer returns at an inverse multiple of the benchmark. If you benchmark falls, you win; and vice versa. If you’re already a little confused, don’t worry: so apparently are the thousands of financial advisors out there recommending and misusing these products. Not to add the confusion, but...

There’s one other aspect of these complex products that is absolutely crucial to understanding them: they “reset” daily. That means that they are only effective one day at a time and should not be held in investor accounts for any longer than that. According to FINRA, JP Turner’s brokers failed to grasp this unique quality of non-traditional ETFs held the ETFs for not a day, days or weeks--but months at a time!

For more information about non-traditional ETFs, please click here.

If you or anyone you know has been the victim of the misuse of non-traditional ETFs or any other form of broker misconduct or investment fraud, please contact us immediately toll-free at 1-855-462-3330 for a free consultation.

FINRA Is Watching, But Always Be Vigilant

This week a number of articles suggested that, as we feared, Wall Street has learned nothing from the recent financial crisis. Well, maybe not nothing. Rather than steering clear of the securitized debt responsible for the collapse of the real estate market and much of the financial market as well, Wall Street investment firms are working on new and innovative ways of resurrecting securitized financial products (you remember that stuff, right? Layer upon a layer of bad debt with an icing of good debt on top...).

Hopefully, we've all learned in the meantime to be more vigilant and skeptical of the finance world's "miracle" products. Not only that, but the Financial Industry Regulatory Authority and its CEO, Richard Ketchum, are continuing to broadcast their message of "Heightened Supervision" by investment advisors and brokerage firms when it comes to complex financial products. As Ketchum plainly warns, if broker-dealer firms want their affiliated financial advisers to offer tricky investment opportunities like options trading, variable annuities, or complex products like leveraged and non-traditional ETFs, they MUST undertake greater supervision of the advisers and of the performance of the products themselves.

For investors who have already been the victim of the misuse or abuse of one of those products, it's not just a warning: it's a chance to win money back.

As we at The Green Firm have seen firsthand in recent cases, it can often be difficult to recover money from an individual broker's misconduct. Often it's simply a matter of "you can't get blood from stone." BUT, that advisor's misconduct often extends to the supervising broker-dealer. And thanks to Ketchum's strong message, it should become increasingly easy to hold broker-dealer firms responsible for failing to deliver the kind of "Heightened Supervision" that complex financial products require, according to FINRA. Not only does this supervision apply to the proper use of specific products; it also applies to the suitability of specific products to specific investors. In other words, FINRA's concept of "suitability" dictates that there must be an affinity between the investment product and the customer. If you're a risk-averse or conservative investor, your broker should not have you invested in high-risk, complex financial products.

Finally, in the article, Ketchum mentions that, "When a broker moves to a new firm and calls a customer to say, 'You should move your account with me because it will be good for you,' the customer needs to know all of the broker's motivations for moving. In some instances, recommendations to customers can be driven by direct and indirect compensation incentives to the financial advisor and the firm itself."
We at The Green Firm would just like to remind that your own interests and the interests of your broker are not always aligned. The best protection you have against broker misconduct is free: ask lots of questions. If your broker switches employers and insists you migrate with them, be sure to ask what's in it for them.