Variable annuities, nontraded REITs and private placements are among the primary areas in which brokerage firms and their representatives have demonstrated lax compliance, according to a new Finra report detailing recent examination findings.
The
Financial Industry Regulatory Authority Inc. found that some firms overly concentrated retail customers in illiquid securities such as nontraded real estate investment trusts, as well as complex structured notes and sector-specific investments.
The watchdog uncovered deficiencies around variable annuities, including unsuitable and "largely unsupervised" recommendations relative to
annuity exchanges, according to the report, which also detailed lax due diligence on private placements.
The
report, published Friday, is the
second annual summary of findings from
examinations and is part of its push to be more transparent under its
Finra 360 initiative. The report highlights compliance shortfalls based on their significance, frequency, and impact on investors and markets, and isn't necessarily a complete list of all observed deficiencies, Finra said.
"We hope the observations within the exam findings report enable firms to strengthen their own control environments and address potential deficiencies before their next exam," Finra CEO Robert Cook said in a statement.
The organization called out over-concentration and variable annuity recommendations as conflicting with its suitability standards.
For example, some brokers recommend structured notes or sector-specific investments to unsophisticated clients who may not understand them, and disregard the client's financial situation, investment experience, risk tolerance, time horizon, objectives and liquidity needs, Finra said.
Similarly, when exchanging one variable annuity for another, some brokers ignore the increased fees and loss of material benefits experienced by clients. Some brokers concealed the source of funds used to buy new annuities, which may have created unfavorable tax consequences for investors, too. Like nontraded REITs, variable annuities are generally high-commission products, which incentivize some brokers to exchange them for a monetary gain.
Regarding private placements, some brokerage firms failed to conduct reasonable due diligence and meet their supervisory requirements. In some cases, broker-dealers didn't investigate "red flags" that were identified, and overly relied on third-party vendors' conclusions, some of which may have been conflicted because they were paid for by the product issuers, according to the report.
Among the report's other conclusions, Finra found some firms didn't have and maintain adequate supervision to prevent excessive trading in customer accounts. Some brokers also abused their authority with respect to discretionary trading, sometimes executing transactions without client authorization or mismarking order tickets to make it seem as if clients had offered an endorsement.
