A Note To Investment Professional Clients And Friends Of Gustafson Nicolai pc: FINRA Sets Its Priorities For 2015

    In January 2015, FINRA released its 10th annual “Priorities Letter.” Gustafson Nicolai pc provides this overview of the Priorities Letter as a service to its financial services industry clients and friends.

    In addition to the general consumer protection tenor of the Priorities Letter, FINRA tipped its hand as to a number of investment types and products on which it will focus in 2015. Interestingly, FINRA doesn’t necessarily identify the harm associated with the products it has specified, but seems to believe that each of the products poses
    potential problems for investors. So what is on FINRA’s radar this year?
    Interest Rate Fixed Income Securities
    FINRA explains that it is concerned about concentrated positions in products that are sensitive to interest rate fluctuations. Despite the current (and likely future) low interest rate environment, wise investment professionals will take FINRA’s advice at face value.

    Variable Annuities
    Variable annuities have long been on FINRA’s (and the SEC’s) radar. FINRA is concerned about the “adequacy of disclosures made about material features of variable annuities.”

    “Alt Funds”
    FINRA notes that “[t]here is no standard definition of alternative mutual funds, but if a fund’s strategy involves non-traditional asset classes, non-traditional strategies or illiquid assets, the fund could be considered an alt fund. FINRA recommends firms refer to such funds based on their specific strategies, as opposed to bundling them under one umbrella category.” If you have any questions or doubts as to whether you are selling Alt Funds to clients, assume that you are for compliance purposes.

    Non-Traded Real Estate Investment Trusts (REITs)
    As most of our clients know, FINRA has long held Non-Traded REITS in its cross-hairs. As FINRA notes, it is primarily concerned with “general lack of liquidity, high fees and valuation difficulty.”

    Exchange-Traded Products (ETPs) Tracking Alternatively Weighted Indices
    ETPs are new to FINRA, and most investors. FINRA’s concern with ETPs is the low volume of trading and high bid-ask spreads.

    Structured Retail Products (SRPs)
    FINRA’s concern regarding SRPs relates to “complex payout structures and using proprietary indices as reference assets. Complex features, long maturities, and linkages to less-traditional or less well-understood reference assets in some structured retail products may present investors with unique or unfamiliar risks.”

    Floating-Rate Bank Loan Funds
    FINRA alleges that these investments “are difficult to value, have longer settlement times than other investments and are relatively illiquid. As a consequence, funds investing in these loans could face liquidity challenges if a significant number of investors make redemption requests at the same time.” Of course, most investment professionals have known of these dangers for some time.

    Securities-Backed Lines of Credit (SBLOCs)
    SBLOCs are simply loans that “allow investors to borrow money from lending institutions using fully paid-for securities held in their brokerage accounts as collateral.” FINRA “is concerned about how they are marketed.”

    WHAT CAN INVESTMENT ADVISORS DO?
    First and foremost, be mindful of what FINRA tells the public about FINRA’s priorities. See the Priorities Letter here: http://www.finra.org/Newsroom/NewsReleases/2015/P602237
    Additionally, if you have any question or concerns about FINRA, its priorities, or potential enforcement actions, please contact Gustafson Nicolai pc for a consultation and risk management review.