More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Do’s and Don’ts of Advisory Contracts In preparation for a compliance exam, securities regulators typically will ask to see copies of an RIAs advisory agreements. An RIA must be able to produce requested contracts and the contracts must comply with applicable SEC or state rules.
Procedures designed to protect retail investors from the purchase of unsuitable structured securities products (SSPs) might have been inadequate or missing, according to a report issued by SEC staff on Wednesday.
In an examination conducted by SEC staff of 11 broker-dealers, gaps were found in the way customers were informed of the nature of SSPs, in both expense and risk. The reports cited such practices as pricing, and training of supervisors and registered representatives as problem areas offering the potential for clients to be sold SSPs when such products did not fit with their risk tolerance.
The staff found a number of possible deficiencies, including:
- Recommendations of unsuitable SSPs to retail investors;
- Trading at prices disadvantageous to retail investors;
- Omission of material facts about SSPs offered to retail investors;
- Engagement in questionable sales practices with customers.
In a statement, Carlo di Florio, director of the SEC’s office of compliance inspections and examinations, said, “Sales of structured products to retail investors have increased over recent years and may continue to increase as they are marketed as a higher return investment alternative. This report could help companies strengthen their compliance programs to better address the issues we observed during our sweep and in subsequent exams.”
He added, “Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection.”
Six major categories of observations were cited in the report: customer suitability (customer specific suitability and concentration risk); disclosure documents; customer account statement classification; secondary market pricing; training; and secondary market activity.
Based on these observations, the staff report made recommendations for both large and small broker-dealers that included closer attention to training, suitability, and disclosure, among other things.