The Financial Industry Regulatory Authority is reminding broker-dealers of their sales practice obligations when recommending alternative mutual funds, also referred to as “alt funds” or “liquid alts.”
FINRA notes in a Regulatory Notice that it has taken enforcement actions recently against several firms for failing to establish or maintain a reasonably designed supervisory system for recommendations of alternative mutual funds.
FINRA states that it continues to note such deficiencies in its exams and communications reviews of these products.
In recent exams and communications reviews, FINRA explains that it has found:
Inadequate Written Supervisory Procedures
Firms did not address alt funds in their WSPs or maintained WSPs that mentioned the funds but did not include detailed sales practice and review procedures (and, as a result, did not conduct heightened investigation into the funds — including reviewing their unique risks and features — before approving the fund for sale to customers).
Inadequate Alt Funds Oversight
Firms did not implement effective oversight of registered reps’ recommendations of alt funds.