Finra Turns its Ever-Watchful Eye on Frontier Funds
The Financial Industry Regulatory Authority (“Finra”) plans to pay special attention to frontier markets mutual funds and exchange-traded funds in examinations of broker-dealers this year after concerns were raised that the risks of such funds are not being adequately disclosed to retail investors.
Heightened risks associated with investing in foreign or emerging markets generally are magnified in frontier markets which operate in politically unstable regions of the world and are subject to potentially serious geopolitical risks.
In many cases, these markets have relatively few companies and investment opportunities, and the local securities market may not be fully developed. This could mean less liquidity and lower investor protection standards.
Indeed, the biggest concern with frontier market stocks is investors' access to their capital. Since most of the local stock markets are in the early stages of development, none of the issues are particularly liquid.
Especially, frontier mutual funds invest in countries that are less developed than emerging markets, typically those in Africa or the Middle East. Therefore, frontier markets are a relatively small niche among mutual funds and ETFs.
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