2016 FINRA Priorities Letter Includes Culture and Ethics, Suitability, Seniors, Complex Products
FINRA released its 2016 Regulatory and Examination Priorities Letter in which the regulator specified a series of items it plans to watch closely during the upcoming year. The letter includes several key issues FINRA identified as areas of focus and reoccurring concern.
Among the broad issues in 2016 are firm culture, conflicts of interest and ethics. Specifically, FINRA is concerned with how a firm, through supervisory systems, risk management or otherwise, will ensure that a conflict of interest will not disadvantage customers.
FINRA plans to address issues of suitability—whether firms or their brokers ensure that investments are appropriate for the particular customer's objectives, risk tolerance and strategy. The regulator discussed where it believes misconduct pertaining to suitability and over-concentration or unsuitable recommendations may exist: "Examples of products and services where one or more of these concerns may be more pronounced include high-yield and speculative bonds, unlisted equities, alternative mutual funds, emerging market funds, structured products, non-traditional exchange-traded products (ETPs) and securities-backed lines of credit (SBLOCs)."
On a related note, FINRA is concerned with protecting senior and vulnerable investors from fraud, elder abuse, and financial exploitation. This class of client may include unsophisticated investors (those not familiar with securities or related finance), customers with diminished mental or physical capacity, including those who have granted their brokers or financial advisers Powers of Attorney and similar privileges, and other investors whose risk tolerance is low/conservative and who have been inappropriately advised to invest in aggressive complex products.
Some of these products may include private placements, where the concern regards issues of suitability, disclosure and due diligence (or lack thereof). Noting that some of these products carry "significant risks" of loss of principal or lack of liquidity, FINRA plans to focus on private placements, how they are advertised or marketed, and in what matter they are transacted.
Non-traded real estate investment trusts (REITs) make yet another appearance on FINRA's priorities list, as do Direct Participation Programs (DPPs). FINRA wants to see greater transparency on fees and expenses, such as high commissions, and wants to ensure that these products' complexity and illiquidity risks are properly communicated and explained to investors.
Finally, FINRA is keeping a close eye on how firms monitor transfers of customer funds—specifically from a brokerage or bank to a third-party account. Whether via wire or checks, customer fund transmittal becomes a concern when such a transfer to a third-party account "would result in a change of beneficial ownership," something that may not be in the best interest of the investor or may be a red flag indicative of fraud or other illicit activity.
If you have invested with a firm, broker or financial adviser whose conflict of interest, unsuitable recommendations, over-concentration, lack of due diligence or other misconduct has proven harmful to your investments or interests please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.