Finra keeping pressure on complex products in 2014

Annual list of priorities has old favorites as well as some new areas of concern

Jan 3, 2014 @ 12:50 pm

By Mark Schoeff Jr. and Mason Braswell

Finra's opening salvo of 2014, its annual list of examination priorities, sent a clear message to broker-dealers, especially those dealing in complex products: Don't expect any relief in the new year.

The document, which Finra's approximately 4,200 member firms will review carefully to shape their compliance efforts in the coming year, re-emphasized common trouble spots for broker-dealers, while also ratcheting up enforcement in key areas, including interest-rate-sensitive products and rogue brokers.

“It's kind of like, 'We're going to look at everything like we always do every time,'” said Daniel Wildermuth, chief executive of Kalos Financial.


Nontraded real estate investment trusts, complex structured products, emerging-markets investment funds, mortgage-backed securities, long-duration bond funds and municipal securities are among Finra's priorities in its monitoring program, according to the letter, which was posted on its website last Thursday.

Complex structured products have made the list every year since Finra began sending the letter out in 2006 under the National Association of Securities Dealers, so their inclusion came as little surprise, according to Joe Halpern, who runs Exceed Investments, a product development company focused on structured investments.

“Structured products will be on this list forever,” he said. “This whole list is a fair list of the complex products out there.”

The new twist this year was Finra's focus on fixed-income products and hedging products that could be susceptible to interest rate volatility. The regulator included investments such as long-duration bond funds and emerging-markets debt on its list of concerns.

“Finra 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's letter stated.

Mr. Wildermuth, whose firm focuses on alternative investments and structured products, said he agrees with Finra's concerns that investors might not understand the impact of rising rates on these products, but he also said that Finra's regular inclusion of these products on its watch list continues to make it tough on firms that seek to employ these strategies legitimately.

“I don't disagree with interest rate sensitivity, but I do disagree with the assumption that they're boxing you into a corner that anything you do is suspect or suspicious,” he said.

Executives at Mr. Wildermuth's firm have found themselves trying to keep ahead of regulator demands. The firm hosts weekly two-hour due-diligence meetings and he said that one of the most helpful practices has been increasing its record keeping.

In the end, brokers have to take Finra's focus in stride, said the head of an industry trade group for the nontraded real estate investment trusts.

“There's not anything out of the ordinary there that has us concerned,” said Kevin Hogan, president and chief executive of the Investment Program Association. “I don't think there's undue scrutiny. It's their recognition that this product is not a mainstream stock or bond. There's some complexity.”

Mr. Hogan agrees with Finra that selling complex products requires enhanced training for sales representatives.

“Education and training is important to this industry in particular,” Mr. Hogan said.

Steven Thomas, director of compliance at Lexington Compliance, a division of RIA in a Box, said that financial advisers need to be even more careful with hedging products, what he calls “land mines” in a volatile interest-rate environment.

“If you haven't been vigilant in documenting why you've been recommending these products and strategies, you better reassess your process and procedures. Otherwise, you're going to get tagged [by Finra] for putting your clients in unsuitable investments,” said Mr. Thomas, former chief compliance officer for South Dakota. “If you've planted the land mines, you better not step backward.”


Finra also said that it will expand a program implemented last year to target rogue brokers who land at new firms after being disciplined or fired.

“When Finra examines a firm that hires these high-risk brokers, examiners will review the firm's due diligence conducted in the hiring process, review for the adequacy of supervision of higher-risk brokers — including whether the brokers have been placed under heightened supervision — based on the pattern of past conduct, and examiners will place particular focus on these brokers' clients' accounts in conducting reviews of sale practices,” the Finra letter states.

Mr. Thomas supports Finra's crackdown on brokers who have a history of disciplinary problems.

“There's not enough legitimate and accurate reporting about why someone has left a firm,” Mr. Thomas said. “Firms are afraid of defamation of character lawsuits.”

But he cautioned that the pipeline between the insurance and securities industries is not being monitored well enough, allowing problem insurance brokers to restart their careers at securities firms.

“There is not a national reporting system for insurance bad apples,” Mr. Thomas said.


What do you think?

View comments

Upcoming event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


Finding your edge from Tony Robbins

Guru Tony Robbins has helped a lot of people, but armed with his psychology Financial Advisor Josh Nelson has helped his practice soar.


Finding innovation in your firm

Adam Holt of AssetMap explains how advisers understand they need to grow, but great innovation may be lurking right under your nose.

Latest news & opinion

Tony Robbins loses role with RIA amid charges of sexual misconduct

String of allegations costs the self-help guru his gig as chief of investor psychology at Creative Planning.

SEC sets June 5 date for vote on Regulation Best Interest

Commission adds new item to agenda: Interpretation of broker guidance that qualifies as advice

House passes SECURE retirement bill with massive bipartisan support

The measure allows small employers to band together to offer plans and raises the RMD age. Another provision eases use of annuities in 401(k)s, which critics say goes too far

10 IBDs with the most annuity revenue

Here are the independent broker-dealers that brought in the most annuity revenue last year.

DOL sets date to propose new fiduciary rule

The regulation, expected in December, likely will be contoured to the SEC's new advice standards.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print