TAG | lack of liquidity
Comments off · Posted by Securities Lawyer in FINRA
In an article for InvestmentNews.com, on February 1st, 2012, Mark Schoeff Jr. writes that in a market defined by low interest rates, investors are searching for higher returns. But brokers better be careful how they try to deliver those results, according to their primary regulator.
In a 16 page letter posted on its website, the Financial Industry Regulatory Authority Inc., (FINRA) outlined its regulatory and examination priorities for 2012. At the top of the list: conduct and products meant to beat the market that instead are unsuitable for investors.
“FINRA is informing its examination priorities against the economic environment that investors have faced since 2008, as these circumstances have steadily contributed to conditions that foster an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud,” the letter states.
“Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields,” the letter continues. Lack of liquidity and inadequate cash flow in investments also are red flags Finra is monitoring.
Shoeff writes that among the products that are on FINRA’s watch list for suitability problems: residential- and commercial-mortgage-backed securities, nontraded real estate investment trusts, municipal securities, exchange-traded funds using synthetic derivatives and significant leverage, variable annuities, structured products, private placements and life settlements.
FINRA said that it is undertaking a “broader data collection effort” and targeting its enforcement efforts on high-risk firms. FINRA warned brokers not to enhance their balance sheets by taking on excessive debt or manipulating their assets and liabilities.
“FINRA is concerned about the additional risks that are being taken as a result of increased leverage, including market, credit and liquidity risk,” the letter states. “We will continue to monitor firms that employ a high degree of leverage, both on-balance-sheet and off-balance-sheet during the upcoming year.”
The InvestmentNews.com article goes on to say that FINRA also is zeroing in on fees.
“We remain concerned about firms’ charging retail investors hidden, mislabeled or excessive fees,” the letter states. “In 2011, FINRA brought cases against several broker-dealers that charged such excessive fees in the form of postage and handling charges that were unrelated to actual costs, and we will continue to investigate firms that appear to be taking advantage of investors through fee schemes.”
FINRA’s guidance on social media is less explicit. It said that it “is a topic on which we continue to receive many questions from firms.” FINRA reiterated that “core regulatory requirements apply to all communications with the public, irrespective of the medium or device used to communicate. Firms must be able to appropriately supervise business communications made using personal devices.”
Schoeff writes that high-frequency trading, and oversight of the creation and redemption of exchange-traded funds, also are listed among the agency’s many priorities. FINRA oversees about 4,460 broker-dealers and enforces the suitability standard, which requires brokers to sell products that fit their clients’ investment needs, timelines and risk appetites.
Other regulators are paying attention to FINRA’s priorities as well.
“States look at these very highly,” said Steve Thomas, director of Lexington Compliance, a division of RIA in a Box LLC, and former South Dakota chief compliance examiner. “They make individual decisions on whether these items should be added to their state’s examinations.”
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Comments off · Posted by Securities Lawyer in FINRA
Securities Attorney, Lars Soreide, of Soreide Law Group, PLLC, would like all investors to take note of the warnings coming from both FINRA, the Financial Industry Regulatory Authority, and the SEC, the Securities and Exchange Commission this past week.
FINRA has warned all investors to watch for structured products that are callable, promise principal protection or have returns based on changes in the yield curve. Although such investments could produce attractive returns, they also might “earn no return for the entire term of the note,” the alert said.
FINRA warned investors about chasing yield with structured products, junk bonds and floating-rate bank-loan funds. The alert was initiated by “significant recent inflows” into high-yielding products, FINRA said.
Structured products “can have significant drawbacks such as credit risk, market risk, lack of liquidity and high hidden costs,” the alert said. Finra also warned that the market for floating-rate loans is “largely unregulated, relatively illiquid and difficult to value.” The underlying loans, however, are “are subject to significant credit, valuation and liquidity risk.”
The SEC released a report last Wednesday also, saying that broker-dealers have been engaging in sales practices for structured securities products that hurt retail investors. Adding that firms may have steered clients into the complex products even though they were not suitable for their portfolios.
The SEC says the riskiest structured products, according to their report, is a reverse convertible note, which is a security with an embedded put option.
Attorney Lars Soreide adds, “When both FINRA and the SEC are sending out warnings, all investors need to be careful when your broker/dealer wants you to consider purchasing complex investment products. Make sure you know the product and what your risks are before purchasing them.”
Securities Attorney, Lars Soreide, of Soreide Law, PLLC, has represented clients nationwide. If you or a family member have lost your investments through risky investments, call a Securities Arbitration Lawyer for a free consultation on how to potentially recover your losses. To speak with an attorney, call 888-760-6552, or visit www.securitieslawyer.com.
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