Securities Industry Continuing Education Program Reveals Investor Protection Priorities

Posted on April 22nd, 2013 at 10:12 AM

Recently, the Securities Industry/Regulatory Council on Continuing Education published its semi-annual “Firm Element Advisory.” That publication is a continuing education topical outline and serves as an excellent resource for identifying “current regulatory and sales practice topics.”  Let’s examine the more important of those investor protection priorities.


            First, the Firm Element Advisory (FEA) identifies alternative investments, specifically the heightened supervision of sales of complex products, as a priority.  The reason for the concern is that complex products “may include a security or investment strategy with novel, complicated or intricate derivative-like features, such as structured notes, inverse or leveraged exchange-traded funds, hedge funds and securitized products, including asset-backed securities.” As a result, investors and, indeed, their financial advisers, may not understand how they perform under different market conditions.  That fact can lead to “inappropriate recommendations and sales” of complex products.  Further information regarding the heightened supervision of complex products may be found in FINRA (the Financial Industry Regulatory Authority) Regulatory Notice 12-03, issued in January, 2013.


            Second, the FEA discusses several new provisions relating to the arbitration of securities disputes.  Among them, the Securities and Exchange Commission (SEC) approved amendments to the FINRA arbitration code relating to subpoenas and orders to direct the appearance of witnesses and production of documents without subpoenas.  Similarly, the FEA discusses the SEC-approved amendments to the simplified arbitration process.  Simplified arbitration now is available for claims alleging damages as great as $50,000.  Another amendment discussed relates to whistleblower disputes.  The SEC also has approved amendments to FINRA industry dispute arbitration rules, which provide that a dispute arising under a whistleblower statute that prohibits the use of predispute arbitration agreements is not required to be arbitrated under FINRA industry dispute arbitration rules.


            Third, the FEA points out that the MSRB (Municipal Securities Rulemaking Board) has launched an online toolkit to equip municipal bond investors with basic information about navigating the municipal bond market.  The toolkit includes information such as evaluating a bond’s default risk, understanding official statements and continuing disclosures, and what to expect from one’s financial adviser.


            Fourth, the FEA discusses the enhanced FINRA BrokerCheck search capabilities to help users more easily access information relating to financial advisers and their firms.  The new search capabilities complement substantive changes made to BrokerCheck to expand the kind of information which is available for investors to access.  The newly available information includes items all historic customer complaints against currently registered financial advisers, ten years of information for former financial advisers, and permanent reporting of substantive, investor-protection type matters for both current and former financial advisers.


            Fifth, the FEA discusses several important sales practice and supervision protections for investors.  By far the most sweeping are the changes made to the Know Your Customer Rule and to Suitability obligations.  While the core principles remain the same, the rules have been modified or are new altogether.  For example, the suitability rule now explicitly applies not just to particular securities recommendations but also to recommendations of investment strategies, including recommendations to hold a particular security.  The duty regarding recommendations to hold is new, and it has sweeping ramifications in terms of how it affects the day-to-day practices of financial advisers, especially when the markets are volatile, and investors consider whether or not to sell a particular security.  Likewise, the rule codifies three distinct suitability obligations.  They are: reasonable-basis, customer-specific and quantitative unsuitability.  Finally, the new suitability adds new factors that financial services firms must attempt to obtain and analyze when making recommendations to buy, sell or hold securities and/or when making recommendations as to an investment strategy.  Those new factors include:  the customer’s age, investment experience, time horizon, liquidity needs and risk tolerance.  Together, they are considered along with the customer-specific factors from the predecessor rule (that is, other investments, financial, situation and needs, tax status, and investment objectives) to comprise the investor’s profile.


            As one can see, the FEA functions as a topical review of the most important current investor protection priorities.  Assuming financial services firms adopt the topics in their continuing education programs, investors should be well served.


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