FINRA Reminds Firms of Sales Practice Obligations for "Alt Funds"

In a regulatory notice, FINRA reminded firms of their sales practice obligations to "alternative" registered investment companies, which FINRA defined as mutual funds that "seek to achieve their objectives through investments in non-traditional investment or asset classes."

FINRA issued this notice following a routine examination of firms' supervisory systems pertaining to alternative mutual funds that resulted in several enforcement actions. Based on the findings of this examination, FINRA noted that the firms failed to:

• properly address the funds in their written supervisory procedures or provide adequate review of the funds prior to approving them for sale;
• implement effective oversight of investment recommendations as to funds and consider the unique risks they pose; and
• sufficiently review the communications used to market the funds.

FINRA outlined the following best practices for marketing alternative mutual funds:

• engaging in more in-depth due diligence, and an evaluation of policy for each fund;

• maintaining documentation of the above-mentioned due diligence;

• restricting certain accounts' ability to invest in the funds;

• implementing new supervisory policies specific to the funds;

• modifying trade surveillance policy or confirming that a fund's current policy can successfully identify these products and associated risks;

• evaluating on a regular basis all approved funds to determine whether new guidelines need to be created based on firm-specific criteria;

• training appropriate staff on regulatory guidance pertaining to the funds; and

• voluntarily filing proposed retail communications regarding the funds with FINRA and incorporating any feedback.

FINRA stated that investment firms must maintain a reasonably designed supervisory system, which includes written procedures to comply with sales practice regulation for all products the firm offers, but specifically for alternative mutual funds due to their "complexity" and "unique risks."