FINRA to target high-yield threats to investor liquidity in 2013

Mon Jan 14, 2013 11:37am EST

Jan 14 (Reuters) - Wall Street's industry-funded watchdog says it is increasing its scrutiny of business development companies, a type of private equity vehicle that can be hard to exit.

The new focus is among the top priorities for the Financial Industry Regulatory Authority's upcoming examinations of U.S. brokerages, according to a letter published by the regulator late on Friday.

Other priorities for FINRA examiners include sales practices aimed at vulnerable investors chasing higher yields and investments in securities tied to leveraged loans, according to the regulator.

FINRA routinely examines brokerages to assess their compliance with securities industry rules. The regulator, which is funded by the U.S. brokerage industry, oversees about 4,290 firms and 630,000 brokers.

The annual "examination priority letter," which FINRA typically publishes on its website in January, outlines the areas that its examiners will be scrutinizing during the coming year.

FINRA's focus on business development corporations marks a change from last year.

BDCs pay generous dividend yields, sometimes as high as 11 percent, and are typically publicly traded. But FINRA said it was concerned about the "increasing issuance" of BDC funds that are not publicly traded.

The nontraded funds pose liquidity risks to investors, who may only be able to exit from the investment by waiting for the BDC to repurchase shares. Investors, in that case, may have to sell at a deep discount from what they initially paid, according to FINRA.

BDCs typically target mid-size companies that have capital constraints or are underfunded.

FINRA will also examine brokerages for compliance with a rule that took effect in July requiring securities to be suitable for investors at all times, not just during the transaction.

Other FINRA examination priorities include brokerage's cybersecurity measures, leveraged ETFs, anti-money laundering compliance and high-frequency trading practices.

FINRA's letter is posted at

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