FINRA Executive Vice President Axelrod Discusses Risks with Complex Products

At the SIFMA Complex Products Forum, FINRA Executive Vice President Susan Axelrod delivered remarks in which she discussed why complex products might pose a risk to investors, how FINRA is working to spot trends sooner, and what steps firms can take to understand risks.

Ms. Axelrod focused on interest rate-sensitive products, as well as structured products that embed fixed-income securities or features. She also mentioned new and emerging structured retail products that concern FINRA, including "steepeners" and "range accrual notes." Additionally, she stated, FINRA remains concerned about alternative mutual funds and products that invest primarily in floating-rate bank loans.

In order to make sure that investors know what they are acquiring and can identify and respond to risks, Ms. Axelrod explained, FINRA is engaging in initiatives to collect more information electronically to better understand the underlying risks associated with a firm's business model. She mentioned FINRA's proposed Comprehensive Automated Risk Data System ("CARDS"), which she said will help FINRA to track products and identify patterns of transactions that could indicate bad behavior. She reminded firms that comments on the CARDS proposal are due by December 1, 2014.

Ms. Axelrod concluded by outlining three steps that firms can take to help their clients understand risks. First, firms that make complex products available to customers must make sure that investors understand how the products operate and the risks of each product. Second, firms should have a process in place for vetting new products and should conduct appropriate due diligence. Third, firms should assess the quality of disclosures provided to customers and make such disclosures clearer and more effective for retail investors.

See: Ms. Axelrod's Speech. See also: SEC Division of IM Director Discusses Complex Products Monitoring and Alternative Mutual Fund Disclosure,