FINRA has outlined its 2012 watch list of business and sales practices aimed at consumers, citing a challenging economic environment that would tempt investors to buy investments with promises of huge returns.
First on the SRO’s list: yield chasing. Given low Treasury return rates, 1.83% on 10-year Treasuries at the market’s close, the regulator says it is concerned investors might be taking risks that they do not understand or that lack proper disclosure.
FINRA detailed its top concerns in a 16-page letter distributed to the industry’s compliance officers. Five of the organization’s top executives signed the document.
Liquidity is another concern of FINRA’s. “The lack of a deep secondary trading market for certain investments make them unsuitable for many retail investors who have strong liquidity needs,” the regulator wrote.
The organization will also take a closer look at the cash flow characteristics of various investments, and examine whether the timing of those investments align with consumers’ time horizons. Also, FINRA will examine whether transparent and accurate financial details are available whenever investors buy them, to ensure that they are making informed decisions.
“The classification of cash flow returns is particularly important so investors know when returns are being paid from their own principal or from capital raised in subsequent offerings,” according to the letter.
Donna Mitchell writes for Financial Planning.