FINRA Podcast: 2014 Regulatory and Examination Priorities – Part 1, Suitability

FINRA released the first podcast in a five-part series that provides an overview of FINRA’s 2014 examination priorities. The podcast primarily focuses on FINRA’s business conduct priorities regarding suitability.  In this podcast, FINRA stated it remains concerned about the suitability of recommendations to retail investors for complex products whose risk-return profiles (including their sensitivity to interest rate changes, underlying product or index volatility), fee structures or complexity may be challenging for investors to understand.  FINRA also stated that examinations will include a review of the training given to retail-facing brokers to determine whether they understand the products they recommend so they can have proactive conversations about product-specific risks with their customers. 

Specifically, FINRA intends to focus on the marketing, sales, and suitability of:

  • complex structured products whose exposure to interest rate risk, leverage or fees might not be understood by customers;
  • private real estate investment trusts (“REITs”) that are hard to value and that have cash flows that are not easily understood by retail investors;
  • frontier funds; e.g., funds investing in emerging countries; and
  • interest rate sensitive securities:
    • mortgage-backed securities,
    • long duration bond funds,
    • long duration bond ETFs,
    • long duration corporates (particularly zero coupon or bullet bonds),
    • emerging market debt,
    • municipal securities, and
    • baby bonds.

Lofchie Comment:  The participants on the podcast are clearly concerned that the economy is vulnerable to a rise in interest rates that would depress the value of long-term bonds, thus hurting the stock market.  In addition, there was a good deal of concern expressed about various types of issuers, particularly with regard to municipal issuers.

See:  FINRA Podcast.
Related news:  FINRA Releases 2014 Regulatory and Examination Priorities (January 6, 2014).


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