Securities Fraud Lawyer Blog
In publishing Regulatory Notice 12-03 FINRA called on broker dealers to increase supervision and compliance when dealing with complex products.” These investments include any security or strategy with “novel, complicated or intricate derivative like features.” Examples are asset backed securities, unlisted REITs, structured notes, leveraged and inverse ETFs.
This notice is the latest in a long line of regulatory notices on complex products that began with 03-07 and 03-71 (dealing with non conventional investments) and continuing with 05-18 and 05-26.
Firms must first perform a “reasonable basis” suitability analysis on the product using independent resources. As part of this process 12-03 requires firms to thoroughly “vet” the product by looking into the assumptions underlying the success of the product to determine how sound it is in light of macro and micro factors. Firms are also required to keep kicking the tires after sales commence and to “periodically reassess” whether the performance and risk profile remain consistent with the manner in which the firm is selling the product.
As to customer specific suitability FINRA is asking firms to use heightened account approval procedures similar to those used when approving options trading. BDs need to confirm that the customer has such knowledge and experience to evaluate the risks of the investment, rather than simply relying on the registered rep to make the recommendation.
In light of the destruction of dozens of mid tier BDs along with the life savings of thousands of investors in complex products over the last several years, this regulatory notice hasn’t come a moment too soon.