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FINRA Report Cautions Broker-Dealers Against Inappropriate Sales of Non-Traded REITs, Private Placements and Variable Annuities

FINRA issued its report of Examination Findings which highlighted a pattern of firms and associates recommending unsuitable investments to retail investors.

The Financial Industry Regulatory Authority issued its Report on FINRA Examination Findings on Friday in which they highlighted a pattern of firms and its associates recommending unsuitable investments to retail investors without considering the customer’s financial situation and the impact of cumulative fees, sales charges or commissions.

The report also cited an overconcentration of illiquid securities, such as non-traded REITs, structured notes and sector-specific investment strategies without bearing in mind the customer’s financial needs, experience, risk tolerance, time horizon, objectives and liquidity needs.

FINRA observed a failure of oversight in firms and adequate supervisory system to identify and prevent potentially excessive trading and account activity by representatives. The organization suggested setting a higher threshold for activity reporting that includes meaningful customer information, such as the number of trades, commissions, cost- or commission-to-equity ratios, margin balances and account losses.

Another area of concern resided with unsuitable variable annuity recommendations. FINRA found unsuitable and largely unsupervised representative-driven recommendations to retail customers, which resulted in the exchange of one annuity product for another. Consequently, customers paid higher fees or experienced the loss of material, paid-for-accrued benefits. In fact, some representatives concealed the source of funds used to purchase new variable annuities that may have resulted in unfavorable tax consequences.

The FINRA report urges firms to take more care in providing suitable recommendations, adequate due diligence and sufficient systems and controls to spot any activity that could harm investors and later result in disciplinary action.

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