FINRA Sanctions Broker-Dealers Regarding Sales of LJM Preservation and Growth Fund (1)Recently, FINRA sanctioned several broker-dealers regarding their actions with respect to the recommendation of sales to customers and supervision of such sales of LJM Preservation and Growth Fund (symbol: LJMIX), an alternative mutual fund.

What is An Alternative Mutual Fund

Alternative mutual funds are often marketed as a vehicle for retail customers to invest in sophisticated, actively managed products, like that of a hedge fund, that will perform well in a variety of market environments. Alternative mutual funds generally purport to reduce volatility, increase diversification, and produce higher yields compared to traditional long-only equity and fixed-income funds. Moreover, they are often marketed as offering greater liquidity than similarly yielding securities.

Risks Associated With Alternative Mutual Funds

In reality, some of these types of funds are far riskier than described in their marketing material and by broker-dealers who sell them. Despite their possible benefits, alternative mutual funds raise concerns when compared to conventional mutual funds. The Financial Industry Regulatory Authority (FINRA) – the self-regulatory watchdog of the securities industry, has been increasingly concerned about the lack of understanding of these types of investments by both the registered representatives that sell them and the customers who purchase them. In particular, FINRA has been concerned about the lack of understanding as to how the funds will respond to various market conditions or even the strategy in which the fund’s adviser will engage in various market scenarios.

In addition, FINRA has learned that some firms failed to have proper supervisory procedures in place to deal with the risks presented by these investments. FINRA has found that some firms are not reviewing alternative funds through their new-product review process, especially if the firm already has an existing agreement with the fund company.

LJM Growth and Preservation Fund

In particular, LJM Growth and Preservation Fund was an alternative mutual fund that was marketed to investors as a fund that had a conservative strategy. It purportedly had a conservative investment strategy that sought lower risk and moderate growth that would preserve capital.

On March 29, 2018, LJM was liquidated and dissolved after sustaining staggering losses the month before, during a period of extreme volatility. On February 5, 2018, the S&P 500 sustained a one-day drop of 113 points. Investors who held shares on February 6, 2018 had lost approximately 80% of their investment.

FINRA Sanctions Broker-Dealers

Recently, several broker-dealers were sanctioned by FINRA for their actions in the sale of the fund to customers. Specifically, Securities America, Inc., J.W. Cole Financial, Inc. and Cambridge Investment Research, Inc. were censured and fined by FINRA for failing to adequately supervise the sales of the fund and/or to perform proper due diligence. FINRA found that in many instances, the firms:

  • failed to reasonably supervise representatives’ recommendations of the fund;
  • failed to conduct reasonable due diligence on the fund and lacked a sufficient understanding of its risks and features;
  • did not provide adequate guidance or training to representatives regarding the risks and features of alternative mutual funds;
  • did not have reasonable written supervisory procedures advising principals of the firm as to how to supervise recommendations of alternative mutual funds; and
  • The firms’ actions violated NASD Rule 3010 and FINRA Rule 3110, regarding supervision and FINRA Rule 2010, regarding standards of commercial honor and principals of trade.

If you or someone you know has or had a brokerage account with Securities America, Inc., J.W. Cole Financial, Inc. or Cambridge Investment Research, Inc. and have concerns regarding losses in your investments, including LJM Growth and Preservation Fund or possible sales practice violations including fraud, you may be entitled to recover lost funds. The Law Office of Kevin J. Deloatch, Esq. has an extensive securities law practice and over 30 years of experience on Wall Street. Call today at (646) 792-2156 for a free consultation. The time to file your claim may be limited so you should call today to avoid delay.