On November 15, 2011 the Financial Industry Regulatory Authority (FINRA) entered into a settlement with J.P. Morgan Chase who consented to a fine of $1.7 million and agreed to reimburse customers in the amount of $1.9 million in connection with the failure to supervise unsuitable recommendations to invest in unit investment trusts (UITs) and floating-rate funds given to unsophisticated investors who had a conservative risk tolerance and little or no investment experience. FINRA further found that firm’s brokers made the recommendations absent any reasonable grounds to suggest they were suitable for the affected investors.
“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,” said Brad Bennet, FINRA Executive Vice President and Chief of Enforcement.
FINRA found that 260 unsuitable recommendations were made with regard UITs resulting in $1.4 million in losses to customers. Unreimbursed losses to customers based on unsuitable recommendations from brokers to purchase the floating-rate funds totaled $500,000.
A UIT is an investment vehicle comprised of a bundle of securities, which can include risky investments such as high-yield below investment-grade, or “junk” bonds. Floating-rate funds are mutual funds comprised of senior loans made to entities with low credit ratings that increases the credit risk associated with those funds. Generally, both types of instruments are not suitable for inexperienced investors with a low risk tolerance seeking preservation of capital.
Also included in FINRA’s finding was that WaMu Investments Inc., which merged with Chase in July of 2009, also made unsuitable recommendations to customers related to the purchase of UITs and floating-rate funds.
J.P. Morgan Chase stipulated to FINRA’s findings without admitting or denying the charge. The settlement agreement requires Chase to contact eligible customers and complete the process of making restitution payments by April 13, 2012. Accepting such payments, however, does not foreclose affected customers from pursuing arbitration or mediation to recover losses. FINRA encourages customers to consult with a securities lawyer to discuss their rights.