FINRA Regulatory Notice 13-18: Communications with the Public

Tuesday, June 11th, 2013 and is filed under AI Insight News

FINRA recently issued Regulatory Notice 13-18: Communications With the Public to provide guidance to firms on communications with the public concerning unlisted real estate investment programs, including unlisted real estate investment trusts (REITs) and unlisted direct participation programs (DPPs) that invest in real estate. This notice can be read in its entirety here.

Richard Ketchum, Chairman and CEO of FINRA, recently gave a speech at their annual conference in Washington DC on May 21, 2013. After providing an overview of some of the meaningful improvements in supervision and compliance, Mr. Ketchum said “we continue to see many instances of breakdowns-whether it’s the serious financial failures and sales practice abuses accompanying the credit crisis or, in the last two years, the sale of complex products and speculative products with low liquidity, to unsuitable customers by financial advisers who often don’t fully understand the risks of the products. So it’s a good time for us to think about how we can do a better job of anticipating problems and making sure investors better understand their investments.

While discussing the fixed income markets and investors taking risks they don’t understand or cannot afford he stated “funds that invest in floating-rate loans may be marketed as products that are less vulnerable to interest rate fluctuations and offer inflation protection. But the underlying loans held in the fund are subject to significant credit, valuation and liquidity risks that may not be transparent to investors. If you are going to make these investments available to retail investors, you should think carefully of how to explain the possible negative scenarios that can impact this investment to your clients and your financial advisers. Similar points could be made for a range of illiquid investments, including private REITs, closed-end funds and private placements.” Mr. Ketchum went on to say “thinking through how firms can do a better job of talking to customers about risks like these is part of the overall conversation about conflicts of interest. It’s especially important as investors move into more illiquid, complex and speculative products-or overly concentrated positions where they may not understand their exposure.” Another item of interest he mentioned was “how do we change the dynamic so investors truly understand what they’re buying and, likewise, that financial advisers understand what they are selling?” This speech can be read in its entirety here.