The Securities Lawyer Blog has posted in the past on compliance issues that have arisen concerning programs and policies for broker training and supervision at various firms. Recently, The Financial Industry Regulatory Authority (FINRA) settled a matter concerning the training and supervision of brokers in the sale of Unit Investment Trusts (UIT's).
The settlement was reached with Chase Investment Services Corporation (Chase) for $3.6 million in reimbursements and fines with regard to the sale of UIT's. Brokers who were part of what was WaMu Investments, Inc., acquired by Chase two years ago, were also alleged to have been involved in the sales activities that led to this matter. Customer losses were said to have resulted from the alleged sales recommendation of various investments that were later determined to be unsuitable.
The investigation by FINRA centered on the recommendations brokers of the firm made with regard to UITs and floating rate loan funds. It was said that these customers were not only unsophisticated, but had conservative risk tolerances and that due to these factors, reasonable grounds for the recommendation.
Suitability with regard to higher risk investments has been a major issue in enforcement, especially since the financial crisis began as losses have become more common. One of the main issues in this matter was FINRA's contention that the firm "failed to implement supervisory procedures" that would have ensured the supervision of the sales of these higher-risk investments.
The investors involved in this matter were those with little or no investment experience. It was alleged that the firm's brokers recommended these investments to about 260 customers.
Specific investments on Chase's list of approved products included those with many assets that were held in closed-end funds with high-yield or junk bonds. FINRA concluded that due to the investors lack of experience and to the obligation to determine suitability of higher risk investments for conservative risk customers, the firm had failed in its obligations in this regard as these customers invested outside their risk tolerance. These customers sustained losses of about $1.4 million in what were deemed to be unsuitable investments.
Other customers suffered losses of about $500,000 in risky, potentially illiquid and high credit risk floating rate loan funds. These customers also had conservative risk tolerances. Although these customers sought preservation and liquidity, the investments were recommended.
New York City's Gusrae Kaplan Nusbaum PLLC, represents broker-dealers in all aspects of compliance -- counseling them in their programs and policies and before all industry regulatory agencies. Please contact our law firm for a confidential consultation with one our lawyers regarding representation and our litigation and advisory practice. Our highly-respected, preeminent lawyers have decades of experience and expertise representing broker-dealers.
