FINRA Outlines 2014 Regulatory Priorities



Rising interest rates and the popularity of alternative investment products are causing the Financial Industry Regulatory Authority (FINRA) to take a closer look at the suitability of long-duration bonds sold by retail brokers and advisors, the agency said.

The industry-backed regulator also said it would expand its high-risk broker program and, beginning Jan. 13, keep tabs on the sales practices of municipal advisors in light of new Securities and Exchange Commission registration requirements about who is qualified to dispense advice in the municipal marketplace.

FINRA’s latest agenda items were included in its annual letter to investors outlining the agency’s 2014 regulatory and examination priorities.

“Given the proliferation of complex products recommended to retail investors, we intend to focus our examinations on the manner in which firms disclose material risks to investors and the policies and procedures surrounding those disclosures,” FINRA said.

Advisors and investors are attracted to alternative investments – commodities, real estate, derivatives and illiquid investments – to help boost portfolio returns. Returns for fixed-income portfolios generally have been low because of low interest rates.

Although rates have risen in the past six months, they are still low by historical standards and advisors want to squeeze more income from their clients’ portfolios.

Assets contained in alternative mutual funds could reach $490 billion by 2018, according to an estimate by Strategic Insight. Alternative funds are most often used for diversification, volatility management and hedging, according to Strategic Insight’s Advisor Survey 2013.

FINRA said its examiners would also focus on “concentrations in speculative equities positions in retail accounts,” and on interest-rate sensitive securities. The value of some of those securities could decline, and if interest rates go up quickly, investors with short time horizons are likely to suffer the most as fund managers sell at lower rates.

“Examinations will include a review of the training given to retail-facing brokers to determine whether they understand the products they recommend so they can have proactive conversations about product-specific risks with the customers,” FINRA said.

The authority also said it would expand its High Risk Broker program and add an enforcement team to prosecute recidivist brokers and the broker-dealers with a pattern of hiring them. The program was instituted last year to fast-track investigations of individual brokers with a history of abusive sales practices.

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As the designated examination and enforcement authority for municipal advisors, “municipal advisory activity will be an area of focus in sales practice examinations in 2014,” FINRA also said.

is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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