As sales of high yield and highly speculative products continue to increase, it is important for brokers to remember FINRA's rules for proper sales practices concerning suitability, factual disclosure, concentration requirements/limits, and supervisory obligations. For instance, these products tend to be high risk/high reward, yet it is imperative that in the zeal to sell a potentially lucrative yet volatile product, brokers do not forget (or sometimes deliberately neglect) to adequately disclose the true nature of risk and costs associated with structured products.
In a 23-minute video released on January 26, 2016, FINRA Executive Vice President of Regulatory Operations Dan Sibears discussed several areas of priority in 2016, including suitability issues, and notably, conflicts of interest. Structured products, some of which include Credit Suisse, Velocity Shares, and JP Morgan notes, are front and center in FINRA's discussion of broker misconduct as relates to suitability.
For instance, Sibears cautioned that not only are complex products, such as structured products, dangerous to unsophisticated investors with low risk tolerance, they could similarly harm "a rep that doesn't understand what they're selling." (8:45 in the video).
This follows a 2015 SEC Risk Alert regarding retail sales of structured securities products, which indicated "several significant deficiencies in the areas of suitability and supervision." Namely, the SEC found that firms failed to maintain or enforce adequate controls and failed to conduct both compliance and supervisory reviews of broker and financial adviser determinations of customer suitability.
According to the SEC, these sales practice violations were present in "all of the examined firms," which in total conducted over 26,600 sales of structured securities products totaling $1.25 billion in principal transactions.
Some of these structured securities products are proprietary to and managed by Credit Suisse in order generate greater returns, but at the expense of risk mitigators such as principal protections, which make the Credit Suisse Securities USA X-Links and Velocity Shares Exchange Traded Notes (ETNs) more complex and risky than other securities products.
Some of the structured products underwritten, managed and marketed by Credit Suisse in the X-Links and Velocity Shares ETNs include:
> Credit Suisse S&P MLP ETN (NYSE: MLPO)
> Credit Suisse X-Links Commodity Benchmark ETN (NYSE: CSCB)
> Credit Suisse X-Links Commodity Rotation ETN (NYSE: CSCR)
> Credit Suisse X-Links Cushing MLP Infrastructure ETN (NYSE: MLPN)
> Credit Suisse Velocity Shares 3X Long Crude ETN (NYSE: UWTI)
> Credit Suisse Velocity Shares 3X Natural Gas ETN (NYSE: VGAZ)
JP Morgan Strategic Volatility Index notes and additional leverage notes linked to JP Morgan's Treasure Notes Futures Tracker may also be at increased risk of sales practice abuse, since these structured notes are similarly more complex and risky than other securities products.
The 2016 FINRA Priories Letter includes initiatives related to suitability, unsuitable recommendations and brokers effecting investments that are inappropriate for the particular customer's objectives, risk tolerance, and strategy.
If you have invested with a broker, financial adviser or firm whose sales of structured products was unsuitable, omitted material facts such as degree of risk or similar disclosure, or was simply inappropriate for your specific investment objectives and risk tolerance, and such 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.