The U.S. Securities and Exchange Commission’s (SEC) examinations of broker-dealers have uncovered weaknesses in ensuring suitability when selling structured products to retail clients.
The SEC issued a risk alert to brokerage firms on Monday concerning the retail sales of structured products after compliance exams found “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 is intended to raise awareness of these weaknesses so that firms can ensure their compliance programs are up to snuff, the SEC says. As part of the SEC’s examinations, the regulator examined 10 branch offices of registered broker-dealers that distribute structured securities products, finding both weaknesses in the practices within each firm, and discrepancies in the effectiveness of their controls.
“Firms should note the importance of the implementation of controls as well as their design on the effectiveness of such controls,” the SEC’s risk alert says.
At all of the firms the SEC examined, it found failures to maintain and/or enforce adequate controls relating to determining the suitability of structured product recommendations as well as failures to conduct both compliance and supervisory reviews of registered representatives’ suitability determinations.
At one firm, the SEC found that reps “were aggressively recommending [structured products] to customers while appearing to mischaracterize the underlying attributes of the products in light of the goals of the investors, particularly to non-English speaking investors.”
The regulator also found significant activity in the accounts of elderly customers at one firm and evidence that reps at one firm had retroactively changed customers’ investment objectives in their account documentation, without the customers’ approval, to justify concentrated holdings of structured products in their portfolios.