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The Financial Industry Regulatory Authority (Finra) today ordered Chase Investment Services Corporation to reimburse customers more than $1.9 million for losses they incurred by following Chase brokers' advice to buy unsuitable investments.
Finra also fined Chase $1.7 million. In concluding the settlement, Chase neither admitted nor denied the charges, but consented to the entry of Finra's findings.
Finra alleges that Chase brokers, between Jan. 1, 2007 and Dec. 31, 2008, recommended the purchase of unit investment trusts (UITs) and floating rate loan funds to unsophisticated customers with little or no investment experience and conservative risk tolerances, without having reasonable grounds to believe that those products were suitable for the customers.
The customers suffered losses of about $1.4 million as a result of investing in these unsuitable transactions, according to Finra.
Similarly, the floating-rate loan funds sold by Chase were subject to significant credit risks and illiquidity. Concentrated positions in the funds were not suitable for certain investors with conservative risk tolerances or those seeking preservation of principal, according to Finra. Despite this, Chase brokers recommended the purchase of floating-rate loan funds to customers who had conservative risk tolerances, were seeking preservation of principal or were seeking a highly liquid investments, according to Finra. These customers suffered losses of nearly $500,000.
A UIT is an investment product that consists of a diversified, pre-determined basket of securities, which can include risky, speculative investments such as high-yield/below investment-grade or "junk" bonds. Floating-rate loan funds are mutual funds that generally invest in a portfolio of secured senior bank loans made to entities that may or may not deemed investment-grade.
Finra also found that Chase did not provide its brokers with sufficient training and guidance regarding the risks and suitability of UITs and floating-rate loan funds. 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.
"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,'' said Brad Bennett, executive vice-president and chief of enforcement for Finra.
—Jim McConville
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