FINRA Declares that Short-Term Trading of Closed-End Funds is Unsuitable
FINRA fined two large broker-dealers for failing to properly supervise brokers who recommended short-term trading of closed-end funds, which allowed the brokers to collect large up-front sales charges. In addition to the action by FINRA, the firms, following self-induced investigations, paid $2 Million and $3 Million, respectively, to aggrieved investors. FINRA opined that short-term trading of closed-end funds is generally unsuitable because of the large sales charges (up to 4.5%) imposed at the IPO.
OUR TAKE: We understand the churning objection i.e. flipping your clients through multiple closed-end funds for no other purpose than to generate sales charge revenue. We don’t understand the position that short-term trading of closed-end funds is “generally unsuitable.” One of the reasons many closed-end funds are traded on exchanges is to ensure liquidity. FINRA did not allege that any investor lost money on the trading itself.