The SEC alerted brokerages that they need to monitor the sales of risky complex investments to retail clients better. The agency stated that after analyzing 26,600 transactions amounting to $1.25 billion of structured securities products showed a large number of occasions when investments were inappropriate for the buyers.
Currently, brokers are held to a suitability standard, meaning they can only sell products that meet a client’s objectives and risk tolerance.
“In these examinations, staff observed not only indications that the examined firms’ suitability controls may be weak, but also significant weaknesses in supervision and implementation of internal suitability and supervisory procedures across branches of the same firm,” the alert issued by the SEC states. “The risk alert is intended to raise awareness of these types of weaknesses in order for registrants to consider them in their own compliance programs.”
The SEC investigated ten branch offices of broker-dealers. In four branches of one firm, the agency found $96 million of structured-product sales to conservative investors, compared to $11 million to those who described themselves as aggressive. In one of the branches, sales were solicited to non-English-speaking clients.
At two other firms, the SEC discovered large concentrations of structured products in the accounts of older clients. At one of those firms, registered representatives altered the investment objectives in their client profiles after sales, without notifying or receiving permission from the clients, in order to justify the complex products in their portfolios.
The SEC noted that each of the firms investigated had written policies and procedures regarding suitability, but their controls were “inadequately or inconsistently implemented” and sometimes varied from branch to branch.
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