February 15th, 2012
Econintersect: FINRA (Financial Industry Regulatory Authority, an industry self-regulatory organization) has issued a 16-page compliance alert to broker-dealers under its purview. The letter outlined the 2012 watch list for business and sales practices aimed at consumers. The organization’s top concerns address the risk that investors face with some high-yield investments and the lack of liquidity that may exist with other options. FINRA also cautioned against failing to classify cash flow returns because it is “particularly important so investors know when returns are being paid from their own principal or from capital raised in subsequent offerings” rather than from interest or dividends from earnings.
Follow up:Here is an excerpt from Financial Planning Magazine:
Given low Treasury rates, currently at about 1.84% on the 10-year, the regulator says it is concerned investors might be taking risks that they do not understand or that lack proper disclosure. This is also among the concerns that the self-regulatory organization outlined in its 2012 watch list of business and sales practices aimed at consumers.
FINRA warned investors in an alert, and detailed its top concerns in a 16-page letter distributed to the industry’s compliance officers, a FINRA rep said.
Liquidity is another concern of FINRA’s, according to the letter. “The lack of a deep secondary trading market for certain investments make them unsuitable for many retail investors who have strong liquidity needs,” the regulator wrote.
The organization will also take a closer look at the cash flow characteristics of various investments, and examine whether the timing of those investments align with consumers’ time horizons. Also, FINRA will examine whether transparent and accurate financial details are available whenever investors buy them, to ensure that they are making informed decisions.
Although the tone of the article might imply to some that FINRA is giving advice to investors, the letter is not sent to that audience, but to the retail brokers who service retail investors.
Source: Financial Planning Magazine