SEC Says Broker-Dealers Need to Do a Better Job of Monitoring High Risk Products

The Securities and Exchange Commission has put out an alert warning brokerage firms that they need to better monitor the sale of high risk complex investments to retail investors. The regulator said that its analysis of 26,600 transactions of $1.25 billion of structured securities products revealed that there has been quite a number of times when the investments were sold to investors for whom they were not appropriate.

According to InvestmentNews, the Commission examined 10 branch offices of brokerage firms. The assessments took place from January 2011 through the end of 2012. In one firm, they discovered $96 million of structured-product sales that were made to conservative investors. At two other broker-dealers, the SEC discovered high concentrations of structure products in the accounts of older investors. One representative purportedly modified a customer’s investment goals without that person’s consent after a sale went through to make the complex product purchases appear justified.

Brokers are required to abide by suitability standards, which mandate that investment products that are sold meet each client’s risk tolerance and investment goals. The SEC said that in exams that were conducted, there were firms that appeared to have weak suitability controls.

The Commission wants broker-dealers to regard this alert as a wake up call so that they will take a closer look at their compliance programs. The regulator noted that while all the broker-dealers that were scrutinized had written procedures and policies for suitability, the controls were not consistently or properly implemented. In some instances, suitability controls differed among the different branches of a firm.

Structured Securities Products
Structured securities products have become popular with investors because of their promise of high returns, especially during a period of low interest rates. They are usually issued as corporate obligations of the affiliates underwriting a brokerage firm. These products get their value from underlying asset classes and usually have some type of embedded derivatives.

The SEC’s alert concentrates on structured notes. These bond-linked instruments are connected to derivatives. They tend to generate high commissions for registered representatives. Both the SEC and FINRA have placed structured products on their priority list as investments to take a closer look at this year.

At Shepherd Smith Edwards and Kantas, LTD LLP, our broker fraud law firm helps investors recoup their losses. We represent retail investors, high net worth individual investors, and institutional investors.

SEC warns brokerages to monitor risky products better, InvestmentNews, August 25, 2015


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