In examinations of broker-dealers this year, Finra will zero in on the sale of sophisticated investment products whose value can change quickly due to interest rate fluctuations.
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
a letter posted on its website on Thursday.
Finra noted that in the current investment environment, fixed-income products are particularly risky because of potential changes in monetary policy.
“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,” the letter from the Financial Industry Regulatory Authority Inc. states. “In 2014, our examiners will focus on concentrations in longer-duration instruments, including bond funds with longer average durations and high-yield securities recommended to retail investors, especially if those investors have near-term liquidity needs or have a conservative or defensive investment profile.”
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 patters of past conduct, and examiners will place particular focus on these brokers' clients' accounts in conducting reviews of sale practices,” the Finra letter states.
The exam priorities are meant to be a “road map” of issues that pose risk to investors, according to Finra chairman and chief executive Richard G. Ketchum.
“By providing clear and detailed guidance to firms, we hope to not only support firms' compliance efforts but also to alert firms to the issues we have identified as the most salient risks to investors and the integrity of our markets,” Mr. Ketchum said in a statement.
Finra said that it will build on its recent effort to
assess brokers' conflicts of interest. In 2014, examiners will review how firms identify and manage conflicts before and after launching new products.
“Finra will also assess whether wealth management businesses make independent decisions about the products they offer without pressure to favor proprietary products or products for which the firm has revenue-sharing agreements,” the letter states.
Another focus will be
rollovers of assets from 401(k) retirement plans to individual retirement accounts. The regulator will look for instances where the brokerage benefits from the move while investors are harmed.
Other priorities will include protection of senior investors and rooting out fraud in microcap and over-the-counter securities. Finra also said that it will launch a “more structured review” of its member firms' liquidity levels and ask them to perform “stress tests.”
