FINRA Focusing on Sales of Products Promising Higher Yield
FINRA has issued its annual regulatory and examinations priority letter with a focus on sales practices for yield-chasing products, data security, private placements, AML, and BD financials. FINRA expresses a concern about the failure to adequately understand and explain market, credit, and liquidity risk when recommending yield-chasing products in this low-yield environment. As examples, FINRA cited BDCs, leveraged loan products, CMBS, high-yield debt, structured products, exchange-traded funds and notes, closed-end funds, and variable annuities. FINRA also continues to focus on firms’ procedures for protecting customer data from cyber-attacks and intrusions. Also, FINRA will focus on firms’ due diligence of private placements, particularly the issuer’s creditworthiness and business model as well as the expected rate of return. Also, FINRA expresses reservations about automatic investment tools. In light of the HSBC case, FINRA will heighten review of firms’ AML policies and procedures. FINRA is also concerned about member firms’ financial viability and will closely review net capital and customer protection calculations.
OUR TAKE: Firms should re-examine policies and procedures and surveillance of sales practices for high-yielding new products.