FINRA Says That Firms Shouldn’t Rely on Prospectus Disclosure When Selling Cash Alternatives
FINRA issued a Notice to Members that outlines their sales practice obligations for cash alternatives. By “cash alternatives,” FINRA means short-term instruments such as money market mutual funds, auction rate preferred securities, CDs, money market accounts, CP, structured notes, short-term bond funds, and VRDNs. According to FINRA, marketing materials that refer to an instrument as a “cash equivalent” would “raise serious questions under FINRA’s advertising rules.” Firms must provide balanced disclosure about the lack of FDIC insurance, possible losses, factors that affect liquidity, and issuer credit risk. FINRA said that firms cannot simply rely on the prospectus disclosure. The Notice also offers guidance on both the Reasonable Basis Suitability and Customer Specific Suitability obligations.
OUR TAKE: It is noteworthy that FINRA has warned firms that they cannot simply rely on the prospectus disclosures. This may be a first step toward a point-of-sale disclosure document.