Chase Investment Services Corp. has been ordered to reimburse customers $1.92 million for losses they incurred after Chase Investment brokers recommended the customers purchase unsuitable unit investment trusts and floating rate loan funds, the Financial Industry Regulatory Authority (FINRA) announced on Nov. 15.
FINRA also censured Chase Investment and fined the firm $1.7 million for recommending the unsuitable investments, and for failure to supervise, according to the Letter of Acceptance Waiver and Consent (AWC) that settled the matter. These transgressions led to losses of about $1.4 million total among the customers who purchased the unsuitable investments.
As a term of settlement. Chase Investment neither admitted nor denied the charges, but consented to the entry of FINRA’s findings. FINRA is the largest independent regulator for all securities firms doing business in the United States.
About The Securities
A unit investment trust consists of a basket of securities such as corporate bonds, municipal bonds, mortgage-backed securities, or equities. They are sold in different series based upon the mix of products and the suggested goal for the customer, and have a defined maturity date. Unit investment trusts can include risky, speculative investments such as high-yield/below investment-grade bonds, commonly known as junk bonds.
Floating-rate loan funds are mutual funds that usually invest in a portfolio of secured loans made to entities whose credit quality, in many cases, is rated below investment grade. The funds normally have low interest rate risk, but high credit and liquidity risk.
An investigation by FINRA found that Chase Investment brokers recommended the purchase of unit investment trusts and floating rate loan funds to unsophisticated customers with little or no investment experience. These customers had a low tolerance for risk, and Chase Investment brokers recommended these products without having reasonable grounds to believe that they were suitable.
Chase Brokers Made Almost 260 Unsuitable Recommendations
Overall, Chase Investment brokers made almost 260 unsuitable recommendations to purchase unit investment trusts to unsophisticated, risk-averse customers, and the customers lost about $1.4 million as a result.
The floating-rate loan funds sold by Chase Investment were similarly unsuitable. The funds came with significant credit risks and some of them could be illiquid. Given this, heavy investment in these funds was not suitable for conservative investors who were mostly seeking preservation of principal.
Despite this, Chase Investment brokers recommended the purchase of floating-rate loan funds to such customers, as well as to those who wanted highly liquid investments. These customers suffered losses of nearly $500,000 as a result of the unsuitable recommendations.
FINRA also found that WaMu Investments, Inc., which merged with Chase Investment in July 2009, recommended floating-rate loan funds to customers that were not suitable for them. In addition, WaMu failed to provide adequate training and failed to reasonably supervise the sale of floating-rate loan funds to customers.
Letter of Acceptance, Waiver and Consent
According to the AWC, two of the unit investment trusts sold by the firm during the relevant period were unsuitably risky because a large percentage of their assets was invested in closed-end funds containing a lot of high-yield junk bonds.
Closed-end funds, which are publicly traded, have a limited number of shares that are not normally redeemable for cash or securities until the fund liquidates, and new shares are rarely issued once the fund is launched, the AWC said.
There were 3,582 purchases of these two unsuitable unit investment trusts during the period FINRA investigated, representing about $141 million in investments that generated over $2.8 million in commissions for the firm, the AWC said. They were not suitable investments for customers with little or no investment experience and low risk tolerance.
Regarding floating rate loan funds, Chase Investment places limitations on its brokers’ ability to recommend overly-concentrated positions in these funds. Chase Investment was supposed to review all transactions to determine if a trade was in excess of the recommended percentage of assets based on the client’s stated risk tolerance, according to the AWC.
The policy called for investors with low risk tolerances to hold no more than 10 percent of their assets in floating rate funds. Some brokers’ clients exceed this level through waivers or the submission of special disclosure forms.
In some instances, Chase Investment accepted a broker’s update to a customer’s risk tolerance without verifying with the customer that the revision was accurate. In addition, the firm failed to follow up on some trades that fell outside the guidelines, the AWC said.
As a consequence, Chase Investment allowed a number of unsuitable transactions in floating rate funds to occur. Some of those who purchased floating rate funds were bank customers who were seeking a certificate of deposit or some other similar conservative investment, the AWC said. Some of these customers had told their brokers they wanted safe investments where their principal was protected, but were sold a floating rate loan fund instead.
Chase Investment provided no formal training to brokers about floating rate funds. Any information they had came directly from the funds’ marketing materials. Some brokers incorrectly believed that these funds, even the ones that permitted only monthly and quarterly redemption, were suitable for customers seeking a highly liquid investment or preservation of principal, the AWC said.
Chase Investment Charged With Failure to Supervise
Given the above, FINRA also charged Chase Investment with failure to supervise, finding that the broker-dealer failed to implement procedures to reasonably supervise its sales of unit investment trusts and floating rate loan funds.
The growing number of complex products in the market makes it more important than ever for firms to properly train and guide their brokers about the products they sell, and to supervise sales practices, said a statement issued by Brad Bennett, FINRA executive vice president and chief of enforcement.
Brokers at Chase Investment sold risky products without receiving the training, guidance and supervision necessary so they could determine whether the products were suitable for their particular customers. As a result, the customers lost money, Bennett said.
Guiliano Law Group
The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost to unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.