Firms Settle Separate FINRA Charges For Supervisory Failures Over "Alternative" Mutual Fund

Three firms settled separate but largely similar FINRA charges for failing to reasonably supervise recommendations of the "alternative" mutual fund, the LJM Preservation and Growth Fund ("LJM"). (There is no legal definition of an "alternative" mutual fund.)

In the enforcement releases, FINRA defined alternative mutual funds as publicly offered funds seeking "to accomplish the funds' objectives through non-traditional investments and trading strategies." According to the enforcement releases, LJM "sold volatility," profiting from the difference between implied and realized market volatility, and was typically "net short or short volatility." Morningstar characterized LJM as "relatively aggressive and exposed to a steep rise in equity volatility," evidenced when the S&P 500 fell in February 2018 and caused an "unprecedented increase" in market volatility. This in turn dramatically increased the value of the short option positions, resulting in LJM losing about 80%