Share on Facebook
Share on Twitter
Share on LinkedIn

FINRA issued Regulatory Notice 22-11 in April to remind broker-dealers of their obligations in the sale of alternative mutual funds to their clients.  FINRA explained that it published this guidance because of a number of recent enforcement actions it took against firms selling this product.  However, upon closer inspection, 22-11 is simply FINRA’s latest iteration of its expectations of the industry.

Santayana Was Correct

Philosopher George Santayana once remarked that those who do not remember history are doomed to repeat it.  Santayana was not referring to the broker-dealer industry.  But he could have been.  Consider this statement from FINRA:

In the current investment environment, investors and brokers are increasingly turning to alternatives to conventional equity and fixed-income investments in search of higher returns or yields.

This is not in 22-11.  This actually appears in FINRA’s (then NASD Regulation, Inc.) guidance to the broker-dealer community for reviewing new securities products.  In 2005.[1]  This came on the heels of FINRA’s Notice to Members 03-71 concerning non-conventional investments in which the regulator noted “[i]n the aftermath of the recent downturn in the equity markets, NASD reviewed the services and products offered by members and observed that retail investors were being offered an array of different investments as alternatives to conventional equity and fixed-income investments.”[2]

Does this sound familiar?

FINRA could have issued these statements – and, more importantly, its related guidance – at any point in the past twenty years.  This is not a criticism.  Rather, it is a reminder that FINRA has certain expectations of the broker-dealer community.   These include:

The Written Supervisory Procedures Remain a Cornerstone of an Effective Compliance Program

FINRA observed in 22-11 that it cited firms that failed to have detailed written supervisory procedures (WSPs) for selling, or reviewing the sale of, alternative mutual funds or did not have WSPs for this product at all.[3]  This should come as no surprise.  FINRA has made similar statements throughout the years, including:

. . .

Action Item:  It is not enough that broker-dealers have WSPs.  As I noted recently, firms must craft actionable procedures.  A WSP that only explains the applicable law (and I saw those in my time as a regulator) does not create a system that is “reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable FINRA rules.”[8]  A firm’s WSPs should describe what actions must be taken, who is responsible for taking them, when he or she must complete these tasks and how they are memorialized.

. . .

Read more:

Thank you for reading this article.  Please know that I wrote it for informational purposes only (some may consider it ADVERTISING MATERIAL) and did not intend for it to be legal advice or to form an attorney-client relationship with you – especially in jurisdictions where I am not licensed to practice law.  I encourage you to seek your own counsel to help you with your specific situation.  To that end, I invite you to contact me if you would like to discuss my services.

I enable broker-dealers, registered investment advisers and their associates to spend more time growing their business by helping them address a wide range of legal and compliance responsibilities with clear and detailed advice.

[1] FINRA Notice to Members 05-26 (“05-26”) at 2.

[2] FINRA Notice to Members 03-71 (“03-71”) at 765.

[3] FINRA Regulatory Notice 22-11 (“22-11”) at 2.

. . .

[8] FINRA Rule 3110.