FINRA’s Regulatory and On-Site Exam Priorities for 2014
Top 6 Things That You Need to Know!
Gear up and prepare yourselves – FINRA says they’re concerned with:
1) Rogue Brokers and Firms. FINRA is expanding the “high risk broker” initiative that it started in 2013 with expedited investigations by creating a dedicated enforcement unit to prosecute such cases. Moreover, FINRA is using sophisticated analysis to track reps that leave firms that experienced regulatory problems. Both efforts appear to be responses to pressure from Congress to protect investors from rogue firms and reps;
2) Private REITs. Unlike their publically traded brethren, these REITs are not exchange listed. These investments are illiquid and even limited redemption options can be overwhelmed if too many investors rush for the exits. These REITs are hard to value and their distributions are not always made up of rents from holdings, but could include those financed by debt or return of the investor’s principal.
3) Rollover IRAs. Here FINRA seems to be cognizant of certain studies that show the prevalence of roll-overs from old 401(k) plans and studies that show that b-ds and reps may not fully explain all options to investors. Moreover, claims of “free IRAs” may be problematic if investors pay costs associated with such accounts.
4) Frontier Market Funds. These markets are less developed than so-called “emerging markets.“ Examples of “frontier markets” include Nigeria and Vietnam. Among FINRA’s concerns are political risks, only a few large companies comprising such markets and the underdevelopment of those local securities markets;
5) Private Placements. FINRA rules require filings with FINRA regarding b-ds participating in such offerings. FINRA will also be looking at suitability of such recommendations and the amount of due diligence done by the firm in the underlying issuers and their management. Since September of last year, the JOBS Act and the revised Regulation D allow for general solicitation and advertising of private placements under certain circumstances; and
6) Complex Structured Products. Among FINRA’s concerns are the unsecured nature of the products, illiquidity, embedded derivative features in some products and difficulty in properly valuing such products.