In a bit of a change from recent years, FINRA’s 2016 priorities letter does not dedicate as much space to structured products. Similarly, the OCIE’s letter does not single out this area. That being said, these offerings and products are likely to remain a focus for the regulators in 2016.3
For our more detailed blog entries relating to these letters, please click here:
- FINRA Priorities: http://www.mofo.com/~/media/Files/ClientAlert/2016/01/160106FINRAs2016Priorities.pdf
- OCIE: http://www.bdiaregulator.com/2016/01/ocie-publishes-exam-priorities-for-2016/
In particular, these letters contemplate structured products in a number of areas, including the following:
Conflicts of Interest. FINRA indicated that it plans to complete in 2016 the targeted examination that it launched in late 2015 regarding incentive structures and conflicts of interest. For example, to the extent that structured products remain a proprietary product, FINRA will continue to be interested in how these products are offered and sold.
Suitability. FINRA noted that some firms have failed to tailor their systems for determining suitability and concentration to the specifics of their product offerings. FINRA cited structured products as an example. Similarly, the OCIE expressed an interest in the promotion of new and complex products and related sales practice issues, in order to identify potential suitability issues and potential breaches of fiduciary obligations.
Concentration. On a related point, FINRA noted deficiencies is firms’ failure to adequately monitor for excess concentration. This included circumstances in which member firms focused on more risky products without properly ensuring suitable recommendations and avoiding excess concentration. FINRA indicated that it will assess whether registered representatives adequately consider factors such as credit risk, duration, and leverage in connection with complex products.
ETFs. ETFs remain a focus of regulatory scrutiny. For example, the OCIE expressed an interest in the adequacy of risk disclosures and suitability determinations, particularly in the case of nice or leveraged/inverse ETFs.
Broker-dealers can operate under the assumption that structured products remain on FINRA’s radar screen in 2016.