FINRA issued the second in a six-part series of podcasts about its Regulatory and Examination Priorities for 2015. The second podcast examines FINRA’s sales practice priorities when it comes to specific products.
Interest-Rate Sensitive Fixed-Income Securities
- FINRA emphasized that it is critical for firms to discuss the impact of interest-rate changes on prices when marketing fixed-income products. Examiners are looking for concentrated positions and products that are highly sensitive to interest rates, such as high-yield bonds and mortgage-backed securities. FINRA noted that examiners may choose to review a firm’s efforts to educate registered representatives and customers about fixed-income products.
Variable Annuities
- FINRA focused on new purchases as well as 1035 exchanges. FINRA stated that it assesses compensation structures to evaluate how firms incentivize variable annuity sales. Additionally, examiners concentrate on the design and implementation of procedures and training by compliance and supervisory people to test brokers and supervisors’ product knowledge. FINRA also mentioned particular interest in the sale and marketing of so-called L-share annuities.
Alternative Mutual Funds
- FINRA recommended that firms market alternative mutual funds by referring to them based on specific strategies instead of bundling them under a single umbrella category. FINRA also suggested that firms’ communications describe how such funds work accurately and fairly, and that the descriptions are consistent with those in the prospectuses.
Non-Traded Real-Estate Investment Trusts
- FINRA advised firms to continue to be mindful of risks to investors when making recommendations about such products, and stressed the importance of performing due diligence on an ongoing basis on the REITs that firms allow their representatives to recommend.
Structured Retail Products
- FINRA stated its concern that certain brokers and retail investors might not understand the complexities of structured retail products. In light of that fact, FINRA reminded firms that retail communications about such products must be filed with FINRA within ten business days of the communications’ first use. Additionally, FINRA pointed out its focus on the incentive to increase the revenue from structured-product sales through distribution channels that may not have enough controls to protect customers’ interests.
Securities-Backed Lines of Credit
- FINRA recommended that firms put proper controls in place to supervise these programs, and that customers be made fully aware of the programs’ characteristics, including loan restrictions and how changing market conditions could affect customers’ brokerage accounts and ability to draw on loans. Lastly, FINRA noted that firms should maintain operational procedures for interacting with lending institutions to monitor customers’ accounts.
Lofchie Comment: Firms that do retail business should attend to FINRA’s list closely.