Wall Street regulator questions sales of complex securities

Thu Sep 27, 2012 11:33am EDT
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By Suzanne Barlyn

(Reuters) - The Financial Industry Regulatory Authority is looking at potential conflicts of interest and financial incentives stemming from sales of complex securities by major brokerages, the head of the Wall Street regulator said on Thursday.

FINRA is looking "very closely" at the effects of incentive compensation, such as commissions, that might motivate brokers to sell certain complex securities, said FINRA Chief Executive Officer Richard Ketchum.

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.

He did not name the brokerages that the regulator is questioning.

The industry-funded watchdog has been clamping down on sales practices involving 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.

In May, Citigroup Inc C.N Morgan Stanley MS.N, UBS AG UBSN.VX and Wells Fargo & Co WFC.N agreed to pay FINRA more than $9.1 million in fines and restitution for selling leveraged and inverse exchange-traded funds "without reasonable supervision.

In June, the regulator barred a small brokerage from the industry, saying its sales practices for complex securities tied to risky mortgage-backed holdings violated industry rules.   Continued...