Finra president Richard Ketchum says brokerages must make certain reps understand how complex financial instruments work -- before hawking them to clients.
Securities regulators are warning broker-dealers to keep a close eye on structured products, a varied line of investments commonly linked to options.
The products are hot: more than 8,000 different retail structured products were sold last year, said Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc.
“The increasing availability of complex and sophisticated products to retail investors, while beneficial in some ways, can present challenges to a compliance department,” Mr. Ketchum said this morning at Finra's annual meeting in Washington.
“The breathtaking pace of innovation and availability of these more-sophisticated and complex products poses significant challenges to firms,” Mr. Ketchum said. “A solid understanding of an investment product is at the core of suitability analysis and sound sales practices. I am pleased to hear that many firms are taking this challenge extremely seriously and enhancing their product training programs.”
Mr. Ketchum said that some broker-dealers have set up new committees to determine which products they will, or won't, sell.
“Some firms have even established additional controls with respect to those complex products they do permit,” he said. “Some firms require retail customers who are interested in purchasing these complex products to complete an option account approval process. Some firms also pre-qualify retail customers and require them to sign specialized investor qualification agreements.”
Brokers need proper training in the product, Mr. Ketchum said.
“Effective supervision is rooted in a thorough understanding of the product risks, coupled with robust broker training regarding the clients for whom the product is appropriate,” he said. “Brokers cannot rely on firm approval alone to satisfy their suitability obligations. This is particularly important with the proliferation of increasingly complex financial products, and at a time when certain investors are tempted to chase yield in today's low-interest-rate environment.”
Mr. Ketchum also hinted at future enforcements in other areas, saying the regulator would take “a close look at excess charges for routine services which some firms appear to be treating as an additional de facto commission,” such as postage and handling for typical trades. “You can expect to see some enforcement activity in this area with respect to particularly egregious examples.”
(This story was supplemented with reporting from Bloomberg News.)
