Sept 27 The Financial Industry Regulatory Authority is examining major brokerages about potential conflicts of interest and financial incentives associated with the sale of complex securities, the Wall Street regulator's chief said on Thursday.
FINRA is looking "very closely" at how brokerages control, analyze and supervise the effects of incentive compensation, such as commission, that may motivate brokers to sell certain complex securities, said Richard Ketchum, FINRA's chairman and chief executive.
The regulator is also looking at conflicts and incentives at broker-dealers that both develop and sell certain complex products, Ketchum said during remarks at an industry conference in New York.
The industry-funded watchdog has been clamping down on sales practices related to a range of complex securities, including leveraged and inverse exchange-traded funds. Many investors are often drawn to the securities because of the promise of high returns, but are not fully aware of the risks, Ketchum said. Leveraged and inverse ETFs, for example, are designed to amplify short-term returns by using debt and derivatives and are more suitable for professional traders than for long-term retail investors.
FINRA is also asking brokerages about their training practices to ensure that brokers fully understand the features and risks of complex securities before recommending them to investors, Ketchum said.