Articles Tagged with Regulatory Priorities

In a move that signals the need for heightened due diligence and supervision among financial advisory firms, the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 12-03 in relation to complex products last month. It is intended to guide firms to increase their supervision of activity involving complex products such as structured notes, reverse convertibles, inverse or leveraged exchange traded funds, hedge funds and securitized products. FINRA has already brought a number of enforcement actions against firms relating to complex products, charging inadequate supervision, unsuitable recommendations and misleading price sales.

Among the problems noted by FINRA is the uncertainty of how these products will behave in the market, as opposed to theoretical projections. The notice states, “Regulators have expressed concern about complex products because the intricacy of these products can impair the ability of registered representatives or their customers to understand how the product will perform in a variety of time periods and market environments, and can lead to inappropriate recommendations and sales.”

FINRA chose not to define a complex product in the notice due to the ever changing innovation in the marketplace; however, the notice states that “any product with multiple features that affect its investment returns differently under various scenarios is potentially complex.” The notice goes on to give a non-exhaustive list of examples of complex products. FINRA advises firms that are unsure whether a product is complex to err on the side of applying their procedures for enhanced oversight to the product.
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