Jan 14 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
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
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
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
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
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