FINRA to Target Complex Investments Including REITs, ETFs and Mortgage Backed Securities in 2014 Exams

Attorney Advising Disclaimer

FINRA announced its Business Conduct Priorities for 2014 on Thursday, leading off with the issue of suitability of recommendations for complex products. In its discussion about suitability, FINRA referred to the following priority areas which the Authority plans to place emphasis on in its upcoming industry exams:

(1) Complex Structured Products continue to concern FINRA not only because they represent a real risk to investors who may not understand—and may not be adequately informed by their brokers—that such products are often unsecured, illiquid and may rely on the use of leverage, derivatives, or other properties that increase risk, such as complex leveraged exchange traded funds ("ETFs").

(2) Real Estate Investment Trusts ("REITs"), and more specifically non-traded REITs are generally illiquid and associated with high fees that wind up eroding total return. Non-traded REITs are associated with a complex valuation process which make REITs a difficult product for investors and brokers alike. For instance, in October 2013, the North American Securities Administrators Association (NASAA) added non-traded REITs to its list of top threats to investors.

(3) Frontier Funds are investments in what fund managers believe to be emerging markets that oftentimes operate in politically or economically unstable regions of the world and are accordingly risky. Because these new markets may not be fully developed, frontier fund investments may be less liquid and investors less protected due to lower regulation standards.

(4) Interest Rate Sensitive Securities are products whose value is influenced by the rise or fall of interest rates—specifically a tendency to lose value when interest rates rise. This category of investments includes mortgage-backed securities, long duration bond funds, long duration bond ETFs, baby bonds associated with business development companies, emerging market debt and municipal securities that may suffer from the aforementioned instability associated with frontier funds (think: risk due to credit and market risk in financially distressed municipalities such as Detroit or Puerto Rico).

Calling the examination priorities a "road map" of issues that pose risks to investors, FINRA chairman Richard Ketchum described his goal to "not only support firms' compliance efforts but also to alert firms to the issues we have identified as the most salient risks to investors and the integrity of our markets."

In addition to heightened efforts to identify brokers' conflicts of interests, FINRA will expand a 2013 program intended to target rogue brokers and more clearly identify repeat offenders.

If you have invested in a complex securities product with a broker or financial adviser whose unsuitable recommendations or misrepresentations have proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.

News: FINRA targets complex, interest-rate sensitive investment in 2014 exams (InvestmentNews)

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