The Financial Industry Regulatory Authority (FINRA) on Tuesday released its 2012 regulatory and examination “watch list,” which provides a laundry list of products the regulator will be zeroing in on and warns broker-dealers not to promote products and practices that are meant to beat the market instead of promoting what’s most suitable for investors.
Among the products that top FINRA’s watch list for suitability issues include: residential mortgage-backed securities and commercial mortgage-backed securities; non-traded REITs; municipal securities; complex exchange-traded products; variable annuities; structured products, private placements and life settlements.
FINRA also warned that it would be zeroing in on broker fees and had a heightened focus on branch office inspections.
In a 16-page letter, FINRA said the “challenging economic environment can lead individual retail investors to be susceptible to recommendations to chase yields without necessarily understanding the risk-versus-reward tradeoffs, particularly as more esoteric or complex products find their way into retail portfolios.
FINRA went on to say that the “current environment can exacerbate underlying business-conduct issues that have a detrimental impact on retail investors. Some of our concerns include the full disclosure of material risks, mispricing and overcharging issues, and the suitability of products based on those underlying risks.”
The regulator said that since 2008, the economic environment that investors had faced had steadily contributed to conditions that fostered “an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud.”
Chief among FINRA’s concerns include the full disclosure of material risks, mispricing and overcharging issues, and the suitability of products based on those underlying risks.
Against this back drop, FINRA said that it is specifically concerned with: