On January 11, 2013, FINRA released its regulations and priorities examination letter. This annual letter serves as a notice to the industry on what FINRA will be focusing on in the coming year and what it sees as heighten risk areas.
According to FINRA’s letter, “FINRA is particularly concerned about sales practice abuses, yield-chasing behaviors, and the potential impact of any market correction, external stress event, or market dislocation on market prices.”
In addition, Business Development Companies (BCDs), a product that grew in sales volume by 350% last year, is noted to have “significant market, credit, and liquidity risks” and risk concerning over-leveraging illiquid portfolios with low-cost financing. FINRA is worried that the “high distribution rates on closed-end funds attract investors who may not understand that some funds are returning capital.”
FINRA also plans to scrutinize the use of automated investment advice, which is the “use of software solutions to dispense automated investment advice to retail clients.” FINRA is concerned about the quality and quantity of information the automated platforms gather and how they match it with portfolios and individual risk tolerance.
Also, the substantial growth in sales of Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) that use leverage, track volatility, or measure emerging markets and currencies is an area of concern. ETFs are a security that tracks an index, commodity, or a basket of assets but trades like a stock; while ETNs are a type of unsecured debt security that combines the aspects of bonds and ETFs. FINRA is concerned that investors do not understand the risk associated with these investments, especially those that use leverage to amplify returns. Furthermore, these ETFs do not have an established track record.
These are just a few of the 26+ areas of concern FINRA has for 2013.
Jason Doss is the owner of The Doss Firm, LLC, an Atlanta-based law firm devoted to representing consumers across the country in a variety of areas including investment disputes and consumer class action litigation. Mr. Doss earned his J.D. from Florida State University in 2002 and his B.A. from the University of Florida in 1997.