The Financial Industry Regulatory Authority has fined J.P. Morgan Securities $3.25 million for failing to reasonably supervise a registered rep who implemented a complex investment strategy that involved purchasing concentrated positions in high-yield securities, while also using margin and other forms of leverage to finance these positions.
According to FINRA's order, the rep's activity occurred between January 2016 through April 2020. Clients invested in this strategy, which included some seniors, lost money during a period of significant market volatility starting in March 2020.
"During the relevant period, the representative recommended this high-risk investment strategy in customer accounts without reasonable consideration of each individual customer's investment profile, including senior customers, customers with moderate risk tolerances, and customers with limited investment knowledge and no prior experience with margin or other types of leverage," FINRA's order states.
The firm failed to take reasonable action in response to red flags related to the rep's trading activity and use of discretion without written authorization, it added.
The matter originated from FINRA's review of a client-initiated arbitration.
The rep's strategy "relied on the expectation that interest from the investments, including non-investment grade bonds and preferred stocks, would exceed the costs of the leverage used to purchase them," the order explains.
"While non-investment grade securities generate higher interest payments than investment grade securities, customers are exposed to a greater risk of losses during market downturns or issuer-specific adverse events," it noted.
The use of margin "magnified potential gains or losses and, in the event of losses, could trigger margin calls, forcing liquidation of positions at unfavorable prices," FINRA said.
The clients engaged in the investment strategy maintained non-discretionary accounts at JPMS.
Instead of contacting the clients for authorization prior to every trade, the rep "routinely exercised discretion in these accounts by executing trades based on recommendations he typically made to customers weekly, monthly, or quarterly," according to the order.
When the markets began experiencing increased volatility in March 2020, certain of the rep's clients "faced steep declines as many of the customers' positions, which were purchased using margin or other leverage, began losing significant value," the order states. "Customers began receiving margin calls and were forced to liquidate significant portions of their portfolios at steep losses."
By the end of April 2020, the rep's customers "began initiating arbitrations and complaints related to his handling of their accounts," the order continues.
In response to client losses and complaints, J.P. Morgan Securities initiated a review of the rep's trading practices and took steps to limit the rep's customers' leverage and concentration levels.
To date, FINRA states, "the firm has paid over $55 million to complaining customers via arbitration awards or settlements and has voluntarily made offers of approximately $1.35 million to six additional customers who incurred losses while engaged in the representative's investment strategy."
J.P. Morgan Securities, which consented to FINRA's findings without admitting or denying them, declined to comment on the matter.
(Source: AP)
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