Complexity creates investor-protection issues
April 20, 2016 — WASHINGTON–(BUSINESS WIRE)–The Financial Industry Regulatory Authority (FINRA) today issued a regulatory notice providing guidance on member firms’ responsibilities concerning the sale of pension income stream products, which typically are contracts that provide a lump-sum payment to a pensioner in exchange for the rights to future pension income payments.
“Pension income stream products are complex and potentially present a number of investor-protection issues, such as significant commissions, lack of liquidity, and inadequate disclosure of how these contracts actually work, including risks for the pensioner,” said Richard Ketchum, FINRA Chairman and CEO. “FINRA member firms need to be mindful of their obligation to properly assess these products and supervise their sale to pensioners.”
According to the notice, a determination of whether a particular pension income stream product is a security depends on the facts and circumstances specific to that product.
However, there can be significant consequences if a firm incorrectly treats a pension income stream product as not being a security. For example, the firm may incorrectly treat it as an outside business activity rather than a private securities transaction, and thus fail to supervise sales of the product as required.
The firm may also violate qualification and registration requirements if representatives selling the products are not qualified and registered to do so.
Meeting the needs of customers?
In addition, the notice states that firms would be well advised to adopt special procedures and training to ensure that representatives selling pension income stream products understand the features and whether they meet the needs of a customer.
Firms also may choose to prohibit the sale of all pension income stream products, or maintain a list of those they find acceptable. Firms should ensure that their procedures comply with state securities laws, as some state regulators have found that pension income stream products are securities under their state laws.
FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services.
FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms.
For more information, please visit www.finra.org.