FINRA to crack down on brokers selling "frontier" funds

January 2
7:41 PM 2014

The Financial Industry Regulatory Authority said it would be stepping up its campaign on brokers who sell emerging market "frontier" funds and similar products deemed to be high-risk to retail investors, the Financial Times reported. FINRA said investors in the US were not provided accurate information about the risk involved with investing in emerging market funds, exchange traded funds and 401k transfers.

FINRA Head Rick Ketchum said they would be looking closely into the disclosure, advertising and suitability controls involving 401k transfers, saying investors were usually not aware of the fees that go with pension fund transfers. Ketchum told FT, "We've seen too many instances in which investors really don't understand their decisions [with their funds] placed in more speculative investments where they don't really understand what the risks are." He added that for rich individuals sand pension funds, putting money in emerging markets made a lot of sense. However, he asked of investors of lesser means actually understood the political risk as well as the volatility involved in such investments.

Head of FINRA's Office for Fraud Detection Susan Axelrod said the regulator would be ramping up its efforts of weeding out disreputable brokers from the industry. She said that they intended to conduct more visits to brokers who are deemed "high risk" as well as their employers. She added that firms that have brokers on their roster with a record of offences should look forward to closer scrutiny in 2014.

FINRA, a self-regulatory organization that evaluates 4,200 securities firms in the US, has levied penalties under $10 million for cases which it considers as relatively serious violations such as those against Deutsche Bank and Barclays. Ketchum defended the fines imposed, saying, ""Those cases were very serious. They were about control issues that we care a lot about. Where you're going to see the extremely large numbers is where there's restitution involved. I think those are the right levels of fines for situations where you're talking about firm controls rather than investor harm."

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