More On Legal & Compliancefrom The Advisor's Professional Library
- Advertising Advisor Services and Credentials Section 206 of the Investment Advisers Act contains the anti-fraud provision of the statute and ensures that RIAs advertising and marketing practices are consistent with the fiduciary duty owed to clients and prospective clients.
- Dealings With Qualified Clients and Accredited Investors Depending upon an RIAs business model and investment strategies, it may be important to identify “qualified clients” and “accredited investors.” The Dodd-Frank Act authorized the SEC to change which clients are defined by those terms.
FINRA announced Tuesday that it had ordered Chase Investment Services Corp. to reimburse customers more than $1.9 million for losses stemming from unsuitable unit investment trust and floating-rate loan fund sales. Chase, who's parent company is JPMorgan Chase, was also fined $1.7 million.
According to FINRA's investigation, conducted by Melanie Hilley, Jonathan Golomb, Thomas Kimbrell and Wendy Velez, under the supervision of Bill Park and Joshua Doolittle, Chase brokers were found to have recommended UITs and floating-rate loan funds to customers with conservative risk tolerances and little experience who lacked a sophisticated understanding of investments. Chase was also found not to provide its brokers with sufficient training and guidance regarding the risks and suitability of UITs and floating-rate loan funds.
Chase neither admitted nor denied the charges.
UITs are investment products consisting of a diversified basket of securities that can include risky, speculative investments such as high-yield/below investment-grade or junk bonds. Floating-rate loan funds are mutual funds with a general portfolio consisting of secured senior loans made to below-investment-grade, or junk-rated, entities.
Two of the UITs on Chase's list of approved products held a large percentage of assets in closed-end funds that contained a significant percentage of high-yield or junk bonds and thus were unsuitable for inexperienced customers with low risk tolerance. Chase brokers made almost 260 unsuitable recommendations to purchase these UITs to customers, who suffered losses of approximately $1.4 million as a result.
Similarly, the floating-rate loan funds were subject to significant credit risks and certain of the funds could also be illiquid, and therefore were unsuitable for conservative investors and those seeking capital preservation. Despite this, Chase brokers recommended them, resulting in unreimbursed losses of nearly $500,000.
FINRA's findings also include that WaMu Investments Inc., which merged with Chase in July 2009, made recommendations to customers to purchase floating-rate loan funds that were not suitable for them, and that WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.
Brad Bennett, FINRA executive vice president and chief of enforcement, said, "With the growing number of complex products in the market today, it is incumbent upon firms to properly train and provide guidance to their brokers about the products that they sell and supervise the sales practices of their brokers. Chase allowed its brokers to sell risky UITs and floating-rate loan funds without providing them with the training, guidance and supervision necessary to determine whether these products were suitable for their customers, which resulted in losses for Chase's customers."