Not a Lexis Advance subscriber? Try it out for free.
LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
By Jay G. Baris, Hillel T. Cohn, Kelley A.
Howes, and Daniel A. Nathan
In its annual summary of
regulatory and examination priorities, the Financial Industry Regulatory
Authority (FINRA) signaled that it will aggressively pursue market misconduct.
The January 11, 2013 report follows closely on FINRA's recent announcement of
the increased high profile regulatory and disciplinary actions it brought in
2012. Member firms should carefully review their compliance policies and procedures
in light of FINRA's stated areas of focus.
Consistent with its mission of
protecting investors by ensuring that the securities industry operates fairly
and honestly, FINRA's priorities focus heavily on retail investors as well as
supervisory issues and regulation and operations of increasingly complex
systems, products and markets.
FINRA is concerned about the
potential for sales practice abuses that may result in the current slow growth,
low-interest rate market environment. In particular, FINRA believes that member
firms and their associated persons may not fully understand the risks inherent
in complex products that they offer to retail investors. Accordingly, FINRA
will focus its examination efforts on compliance with its recently revised
suitability rule (FINRA Rule 2111).
FINRA emphasized that
broker-dealers and their associated persons who sell complex products must
adequately understand the products and their inherent risks. This understanding
is essential because broker-dealers must have a reasonable basis to recommend a
financial product and to evaluate its suitability for a particular customer.
FINRA exams typically will
focus on a broker's understanding of the product, due diligence in assessing
investors' risk tolerance, and, in keeping with its recent theme of supervising
conflicts of interest at broker-dealers, how particular product sales could
affect a broker's compensation (for more information on conflicts of interest,
see our recent News Bulletin regarding FINRA's sweep examination). The annual
summary also expresses FINRA's concern that brokers may fail to explain to
customers the risk-versus-return profile of certain products, and specifies the
need to explain the market risk, credit risk and liquidity risk of complex
products. FINRA identifies several products, including business development
companies (BDCs), leveraged loan products, structured products, exchange-traded
products, closed end funds and variable annuities that provide particular
opportunities for abuse.
Please click on the Attachment: link at the
top of the post to view or download the entire article
For more legal analysis in
financial industry regulation, visit Morrison
& Foerster LLP's online resources.
© Copyright 2011 Morrison &
Foerster LLP. Because of the
generality of this update, the information provided herein may not be
applicable in all situations and should not be acted upon without specific
legal advice based on particular situations.
For more information about LexisNexis products
and solutions connect with us through our corporate site.