John Wasik, Contributor
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2/09/2012 @ 11:25AM |605 views
Scams On FINRA's Radar Screen
FINRA, the brokerage industry’s self-regulator, recently
announced a list of priorities for 2012. It’s a “who’s who” list of
suspect and junk investments the regulator is officially targeting (http://www.finra.org/Industry/Regulation/Guidance/P122861).
While it’s not a direct letter to the investing public — it’s to FINRA members who are compliance officers — it provides some important insights on the worst investments being sold. Its bureaucratic language highlights some egregious sales practices.
FINRA highlights some major marketing abuses such as “yield chasing” and “cash flow characteristics.” In Main Street parlance, brokers often target older investors who are sick of the lousy yields they are getting in CDs and money-market funds and tie them up in products that promise much more but lock up their money for years.
One of the worst abuses is selling products that pretend to offer high yields, but are highly illiquid, risky and complex. The generic term for these traps for unsuspecting investors is “structured” products. They usually contain derivatives, that is, they are expensive wagers based on other vehicles such as stocks, bonds, mortgage securities, commodities or currencies.
Some of the most notorious structured products, often tagged as “principal protected” or “reverse convertibles,” have gone belly up, fleecing investors for billions. The most high-profile case has been Lehman principal-protected notes, which were sold as high-yield bonds. When Lehman collapsed in 2008, investors were left holding the bag. Many are still trying to get their money back.
I’ve written extensively about this problem and published an in-depth report (http://www.demos.org/publication/how-safe-are-your-savings-how-complex-derivative-products-imperil-seniors-retirement-sec) and article (http://www.theinvestigativefund.org/investigations/economiccrisis/1473/how_safe_are_your_savings/) on the subject.
Although FINRA has fined a handful of structured products marketers, they’ve been characteristically sheepish about policing the $45 billion industry, which flies under the radar and wasn’t curbed in the Dodd-Frank financial reforms. Nearly every major investment bank and broker still sells these products.
Here’s a sampling of some actions FINRA took in 2010 to punish minor players:
FINRA fined H&R Block Financial Advisors (HRB) $200,000 and suspended a broker for the firm for selling reverse convertibles to a retired couple (Block neither admitted nor denied the charges). Ferris Baker Watts LLC was fined $700,000 for “inappropriate sales” of these products. The firm had sold the notes to an 85-year-old couple. Some $190,000 was paid to 57 Ferris account holders who lost money (both firms neither admitted nor denied the charges).
While FINRA has pushed for better compliance with its loose suitability standards — and has issued more recommendations and rules — the enforcement has been lax in this area. Remember FINRA is a self-regulator. It’s an industry that purports to police itself. You can draw your own conclusions as to what that means in practice.
What else is on FINRA’s radar screen? Quite a bit. Many of these products have been around for years, although no regulator has been able to effectively curb them:
While it’s not a direct letter to the investing public — it’s to FINRA members who are compliance officers — it provides some important insights on the worst investments being sold. Its bureaucratic language highlights some egregious sales practices.
FINRA highlights some major marketing abuses such as “yield chasing” and “cash flow characteristics.” In Main Street parlance, brokers often target older investors who are sick of the lousy yields they are getting in CDs and money-market funds and tie them up in products that promise much more but lock up their money for years.
One of the worst abuses is selling products that pretend to offer high yields, but are highly illiquid, risky and complex. The generic term for these traps for unsuspecting investors is “structured” products. They usually contain derivatives, that is, they are expensive wagers based on other vehicles such as stocks, bonds, mortgage securities, commodities or currencies.
Some of the most notorious structured products, often tagged as “principal protected” or “reverse convertibles,” have gone belly up, fleecing investors for billions. The most high-profile case has been Lehman principal-protected notes, which were sold as high-yield bonds. When Lehman collapsed in 2008, investors were left holding the bag. Many are still trying to get their money back.
I’ve written extensively about this problem and published an in-depth report (http://www.demos.org/publication/how-safe-are-your-savings-how-complex-derivative-products-imperil-seniors-retirement-sec) and article (http://www.theinvestigativefund.org/investigations/economiccrisis/1473/how_safe_are_your_savings/) on the subject.
Although FINRA has fined a handful of structured products marketers, they’ve been characteristically sheepish about policing the $45 billion industry, which flies under the radar and wasn’t curbed in the Dodd-Frank financial reforms. Nearly every major investment bank and broker still sells these products.
Here’s a sampling of some actions FINRA took in 2010 to punish minor players:
FINRA fined H&R Block Financial Advisors (HRB) $200,000 and suspended a broker for the firm for selling reverse convertibles to a retired couple (Block neither admitted nor denied the charges). Ferris Baker Watts LLC was fined $700,000 for “inappropriate sales” of these products. The firm had sold the notes to an 85-year-old couple. Some $190,000 was paid to 57 Ferris account holders who lost money (both firms neither admitted nor denied the charges).
While FINRA has pushed for better compliance with its loose suitability standards — and has issued more recommendations and rules — the enforcement has been lax in this area. Remember FINRA is a self-regulator. It’s an industry that purports to police itself. You can draw your own conclusions as to what that means in practice.
What else is on FINRA’s radar screen? Quite a bit. Many of these products have been around for years, although no regulator has been able to effectively curb them:
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