SEC to Broker-Dealers: Better Supervise Sales of Risky Products

The Securities and Exchange Commission is warning brokerages to better monitor the sales of risky complex investments to their retail clients.  In a recently issued National Exam Program Risk Alert, the SEC  said that in an analysis of 26,600 transactions totaling $1.25 billion of structured securities products, the SEC observed in a significant number of instances in which the investments were inappropriate for the purchasers.

The SEC reviewed 10 branch offices of broker-dealers. In four branches of one firm, they found $96 million of structured-product sales to conservative investors, compared to $11 million to those who described themselves as aggressive. In one of the branches, sales were targeted to non-English-speaking clients. At two other examined firms, the SEC found high concentrations of structured products in the accounts of elderly customers. At one of the firms, registered representatives changed the investment objectives in the customer profiles after the sales, without the customers’ permission, to justify the complex products in their portfolios.

The SEC said all of the firms examined had written policies and procedures for suitability. But the controls were “inadequately or inconsistently implemented” and could vary from branch to branch.

Firm marketing complex financial products to their retail clients should take time to review the processes and procedures utilized to determine client sutability and confirm thay are being followed.  It is clear that the SEC exam findings will find their way into both the SEC and FINRA’s  exam process.