The Financial Industry Regulatory Authority (FINRA) has ordered Chase Investment Services Corporation to reimburse customers more than $1.9 million for losses incurred from recommending unsuitable sales of unit investment trusts (UITs) and floating rate loan funds.
FINRA also fined Chase $1.7 million.
FINRA's investigation found that Chase brokers recommended the purchase of 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.
FINRA also found that Chase failed to properly supervise its sales of UITs and floating rate loan funds.
A UIT is an investment product that consists of a diversified 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 loans made to entities whose credit quality is rated below investment-grade, or "junk."
"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," Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, said. "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."
FINRA 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.
Due to their composition, these particular UITs were not suitable investments for customers who had little or no investment experience and a conservative risk tolerance. Chase brokers made almost 260 unsuitable recommendations to purchase these UITs to customers with little or no investment experience and a conservative risk tolerance. The customers suffered losses of approximately $1.4 million as a result of investing in these unsuitable transactions.
Similarly, the floating-rate loan funds sold by Chase were subject to significant credit risks and certain of the funds could also be illiquid. Accordingly, concentrated positions in the funds were not suitable for certain investors with conservative risk tolerances or those seeking preservation of principal.
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 investment. These customers suffered unreimbursed losses of nearly $500,000 as a result of these unsuitable recommendations.
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.
In concluding this settlement, Chase neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge. In 2010, members of the public used this service to conduct 17.2 million reviews of broker or firm records. Investors can access BrokerCheck at www.finra.org/brokercheck or by calling (800) 289-9999. Investors may find copies of this disciplinary action as well as other disciplinary documents in FINRA's Disciplinary Actions Online database.