At the SIFMA Complex Products Forum, attendees also benefitted from the views of Laura Posner, Bureau Chief of the Office of the New Jersey Attorney General, New Jersey Bureau of Securities, and Thomas Grogan, Senior Vice President, Deputy of Member Regulation Sales Practice, from FINRA. Ms. Posner and Mr. Grogan participated in a panel on complex products.
Mr. Grogan noted that FINRA Notice 12-03 subsumed FINRA’s prior guidance, which had been contained in various notices to members, relating to complex products. Although he did not foreclose the possibility of new guidance on complex products generally, Mr. Grogan noted that the guidance in Notice 12-03 remained timely. Ms. Posner noted that the New Jersey Bureau of Securities remains focused on sales to retail investors of complex financial products, which may include a variety of products from variable annuities to structured products, to non-traded REITs and non-traded BDCs, to structured credit products.
Mr. Grogan noted that, in connection with its exams, FINRA will want to see materials relating to the member firm’s vetting and approval process for new products. As part of the new product approval process, it is presumed that there will be a discussion of the risks and rewards of the proposed product, the investment thesis for the product, the intended audience for the product, the channels through which the product will be distributed, and training and other requirements related to product sales.
The panelists also discussed training and education for member firm registered representatives that sell complex products. Training is expected to be mandatory and to incorporate some means for assessing whether the registered representative understands the principal features of the product to a prospective client.
Both Mr. Grogan and Ms. Posner commented on sales of complex products to at-risk investors, especially senior citizens and others on fixed incomes. These investors may not understand the lack of liquidity associated with certain products or may not understand the multiple product features, how these may interact, and how these may affect product returns. Similarly, it was noted that there may be some “opaqueness” with respect to fees and potential conflicts of interest that may arise in connection with complex products. To that end, Mr. Grogan noted that FINRA had conducted a sweep on compensation related conflicts of interest. Ms. Posner highlighted NASAA’s model fee disclosure for retail investors as providing a template for broker-dealers. The panelists also commented on concentration issues and trading in and out of complex products in customer accounts. They noted that broker-dealers generally have supervisory and oversight policies and procedures in place, which result in exception reports. Oftentimes, however, they noted that there was a lack of follow up once problematic practices had been identified through the use of the exception reports. They noted that during exams, this was a routine area of focus—that is, identifying the use of exception reports and noting the remedial actions taken by firms to the extent that the reports flagged problematic practices.
