Brokerage Fined $700,000+ for Misuse of Non-Traditional ETFs

The Financial Industry Regulatory Authority (FINRA) recently announced that it has fined Atlanta-based brokerage firm J.P. Turner & Company, L.L.C. more than $700,000 for the alleged misuse and unsuitable recommendation and sale of complex securities products called non-traditional ETFs to customers who had no business holding these products. According to FINRA’s press release, JP Turner brokers also allegedly engaged in excessive mutual fund switches, which involves using mutual fund products designed for long-term use on a short-term basis in order to generate illegitimate trading fees.

In our many successful cases dealing with customers who have suffered losses due to the misuse and abuse of non-traditional ETFs, we have found that investors rarely understand what a non-traditional ETF actually is or how it works. What’s more, very few brokers actually understand non-traditional ETFs! Which is probably why in 2009 FINRA also issued one of its regular “Investor Alerts” about perils of investing in non-traditional ETFs--for brokers and clients.

Photo by  Rafael Matsunaga, Creative Commons

Photo by Rafael Matsunaga, Creative Commons

Traditional ETFs are defined by FINRA as “registered investment companies whose shares represent an interest in a portfolio of securities that track an underlying benchmark or index.” Non-traditional ETFs like those at issue in the case against J.P. Turner & Company generally come in two forms: leveraged and inverse. Leveraged ETFs offer returns at a multiple (often 2X or 3X) whatever benchmark they track. Inverse ETFs act the way they sound: they offer returns at an inverse multiple of the benchmark. If you benchmark falls, you win; and vice versa. If you’re already a little confused, don’t worry: so apparently are the thousands of financial advisors out there recommending and misusing these products. Not to add the confusion, but...

There’s one other aspect of these complex products that is absolutely crucial to understanding them: they “reset” daily. That means that they are only effective one day at a time and should not be held in investor accounts for any longer than that. According to FINRA, JP Turner’s brokers failed to grasp this unique quality of non-traditional ETFs held the ETFs for not a day, days or weeks--but months at a time!

For more information about non-traditional ETFs, please click here.

If you or anyone you know has been the victim of the misuse of non-traditional ETFs or any other form of broker misconduct or investment fraud, please contact us immediately toll-free at 1-855-462-3330 for a free consultation.