Triad Advisors LLC, a securities broker dealer headquartered in Atlanta, Georgia, has been censured and fined $195,000.00 by Financial Industry Regulatory Authority (FINRA) based in part on findings that Triad Advisors failed to supervise stockbrokers’ recommendations of alternative mutual funds, including the LJM Preservation and Growth Fund (LJM), which resulted in losses to Triad Advisors’ customers. Letter of Acceptance, Waiver, and Consent No. 2019061651201 (December 29, 2021).
According to the AWC, LJM was an alternative mutual fund. This fund was marketed to investors as a way of profiting from a volatility premium which was the difference between actual market volatility and investors’ forecasts of volatility concerning options. LJM claimed that the fund was about selling volatility, and it would accomplish this through investing mainly in long and short call and put options on SP500 futures index. A fund report on LJM labeled the fund as an aggressive options seller containing high risks, including that volatility spikes could be detrimental to LJM’s future performance.
The AWC states that Triad Advisors failed to supervise. The regulator points out that there were no systems or written supervisory procedures used by Triad Advisors for purposes of identifying a complex product for suitability. The securities broker dealer did not identify if a mutual fund was an alternative mutual fund which would mean that more due diligence would be required before making the fund available to investors. Steps to fix this were not taken prior to stockbrokers recommending the funds.
FINRA additionally states that there was no training or guidance received by stockbrokers concerning alternative mutual fund features and risks. There were no supervisory procedures used by Triad Advisors to inform supervisors on how to vet these alternative mutual fund recommendations.
The regulator also notes that an electronic trade review system was used by Triad Advisors for supervising stockbrokers’ trading activities. The system was used to flag problematic transactions. But there were no special considerations for alternative mutual funds even though the alternative mutual funds were based on complex strategies. Triad Advisors did not use suitability measures beyond those relating to regular mutual funds, which meant that it did not consider the characteristics and risks of the alternative investments.
The AWC states that LJM was offered by Triad Advisors beginning in September of 2016. There were no limitations on LJM sales put in place by supervisors. Between September 12, 2016, and February 1, 2018, $1,676,500.00 in LJMAX shares were sold by one Triad stockbroker. In total, $2,267,000.00 LJMAX shares had been sold by Triad stockbrokers to 58 customers.
According to the AWC, market volatility caused LJM to incur an 80 percent loss in value by February 6, 2018. By March 29, 2018, the fund was liquidated and dissolved, leaving investors holding shares as of February 6, 2018, with 80 percent losses.
FINRA states that Triad Advisors failed to supervise in violation of Rules 2010 and 3110. The regulator additionally states that private placement customer information was not recorded on Triad Advisors’ records and books concerning LJM private offerings in violation of FINRA Rules 2010, 3110, and 4511.
