More than four years after an alternative mutual fund’s demise should have taught wealth managers a lesson, FINRA says some firms still haven’t learned it.
The February 2018 equity plunge later dubbed the “
“Alt Funds are open-end registered investment companies that seek to achieve their objectives through investments in non-traditional investments or asset classes. Industry participants, including member firms, have marketed or recommended Alt Funds to retail customers as products with sophisticated, actively managed hedge fund-like strategies that will perform well in a variety of market environments,” the regulatory alert states.
“While these funds may be appropriate for some investors,” it continues, “FINRA has consistently emphasized the importance of member firms’ sales practice obligations for these and other products, especially when such products may carry additional risks for customers.”
Although the notice cites earlier warnings about alternative mutual funds such as an SEC investor
“Firms should consider when reviewing their WSPs whether they identify client types that alternative mutual funds would be suitable for, how they should be supervised and the systems/processes utilized to monitor such activity — things your compliance technology should be assisting you in doing,” Gebauer said in an email.
“Training and continuing education will continue to be an effective aspect of compliance training programs,” he said. “Understanding the risks associated with any alternative product offered by the firm and suitability considerations helps representatives and their supervisors understand what’s expected.”
It could also save the clients and the firms a great deal of money, with the five letters of acceptance, waiver and consent from the past two years cited by FINRA ordering combined fines and restitution above $5 million.
The recent exams and reviews of FINRA members’ communications revealed insufficient scrutiny of firms’ public promotion of alt funds and inadequate procedures and oversight, according to the regulator. The “effective practices” it has observed include specific due diligence, documentation, sales restrictions, bulked-up oversight, more surveillance and extra training for advisors and supervisors, according to the notice. The regulator also provided a list of questions that could help firms consider any changes to their supervisory practices.
“Firms should not infer any new obligations from the questions for consideration and may wish to evaluate the questions presented below in the context of a risk-based approach based on their business model,” the notice states.
