FINRA flags liquid alt concerns

The U.S. self-regulatory organization, the Financial Industry Regulatory Authority Inc. (FINRA), is warning firms about ongoing investor protection concerns with the sales of alternative mutual funds.

In a notice to the industry, the SRO said that it continues to see deficiencies in its compliance reviews involving alt funds (AKA liquid alts), particularly when it comes to sales practices, and dealers’ oversight in this area.

Among other things, FINRA said that it continues to find that dealers don’t properly address alt fund sales practices and supervisory reviews in their written procedures.

It also found that firms don’t have effective oversight of reps’ alt funds recommendations.

And, it said that firms aren’t providing adequate disclosure to investors about the features of alt funds, including added risks that may accompany the funds’ complex strategies.

FINRA noted that it has recently taken enforcement action against several firms for supervisory failures involving the sale of alt funds, including cases that targeted shortcomings in firms’ due diligence, a lack of training for reps on alt funds specifically, and poor oversight of these sales.

The notice sets out an array of best practices in this area, including firms that have imposed restrictions on the sale of alt funds to certain types of clients, firms that have adopted enhanced trading surveillance, and firms that engage in ongoing evaluations of approved products.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.