Finra targets selling-away cases

At the top of Finra enforcers’ to-do list right now: Looking into selling-away cases, municipal disclosures, structured products and leveraged exchange-traded funds, Jim Shorris, executive director of enforcement at the regulator, said in an interview yesterday.
In cases in which investors lost money, the Financial Regulatory Industry Authority Inc.’s top priority is to make sure the losses are at least partially refunded, he said.
Selling away is one area where Finra is likely to bring more cases, Mr. Shorris said. Selling away involves brokers who engage in private-securities transactions away from the supervision of their broker-dealer firms. Brokers must have written pre-approval from their firms for such transactions.
Many firms allow outside activities, including securities transactions, as an accommodation for brokers involved in other businesses, such as tax planning or advisory work.
In the current low-rate environment, investors and brokers are easily lured by promises of higher yields on investments that were not approved by a registered representative’s firm, Mr. Shorris said.
“People trying to live on that yield are particularly vulnerable” to the promise of a high return, he said. (For more on the growing number of selling-away cases, see the upcoming issue of InvestmentNews.)
Finra is also taking a look at whether its members are selling municipal bonds from issuers who are not up to date on their financial disclosures, and underwriters who recommend interest-rate swaps that backfire, Mr. Shorris said.
Structured products, and principle-protected notes in particular, are under also Finra’s microscope, he added. “With principal-protected notes, our concern is that there may be some misinformation [about] the source of that principle protection,” Mr. Shorris said. “There’s some question of whether the customer understands” that the notes are often backed by the issuing brokerage firm.
Other products of concern are inverse and leveraged exchange-traded funds, which are “really designed for [short-term] sophisticated hedging strategies,” Mr. Shorris said.
Finra is also worried about the high commissions many sales representatives are getting for life settlements.
In the wake of the financial crisis and the wave of Ponzi schemes, securities enforcers have been criticized for missing problems.
A recent report from the Securities and Exchange Commission’s inspector general faulted the agency offering enforcement staff members incentives based on the number of cases they file.
The report also said enforcers in the SEC’s Fort Worth, Texas, office, were reluctant to pursue a difficult case against Allen Stanford.
The SEC now says it has changed its evaluation system to reward staff members for bringing significant cases.
“It’s fair to say the numbers [of cases brought] are not the only way of” evaluating enforcement efforts, Mr. Shorris said.
Finra wants go “beyond collecting fines” and ensure restitution to customers and the prevention of future problems, he said.

Related Topics: Financial Industry Regulatory Authority