FINRA Orders JP Morgan To Pay Over $3.6M For Recommending UITs And Floating Rate Loan Funds To Unsophisticated Customers
The Financial Industry Regulatory Authority (FINRA) announced November 15, 2011 that it had slapped JP Morgan Chase & Company (JPM) with a $1.7 million fine for recommending unsuitable investments to its customers. This was in addition to ordering the firm to pay customers for more than $1.9 million that they lost as a result of the investments.
The losses were related to the recommendation of unit investment trusts (UITs) and floating rate loan funds to unsophisticated customers with little or no investment experience and conservative risk tolerances. Financial advisers at Chase Investment Services made these unsuitable recommendations, without adequate training, supervision or having any reasonable basis to believe the investments were suitable for their customers. Apparently, FINRA's investigation revealed that there was over $1.4 million in losses related to the UITs and $500,000 related to floating rate loans. FINRA also discovered that WaMU Investments, which merged with JPM in 2009, had made similar improper recommendations to its customers to buy floating rate loan funds.
Both of these investment vehicles are considered to be risky. UITs are basically a basket of securities, including junk bonds that are speculative in nature. Floating rate loan funds are mutual funds that invest in a portfolio of loans made to entities with a poor credit rating. FINRA's investigation revealed that the UITs recommended in some 260 trades were composed of closed end funds that were primarily invested in junk bonds. Likewise, the Chase investment advisers recommended risky floating rate loan funds to inexperienced and unsophisticated customers who wanted to be conservative and preserve their capital. Those funds contained substantial risk and were subject to illiquidity.
FINRA's Executive Vice president and Chief of Enforcement, Brad Bennett, made this statement regarding the case: "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 customers."