top of page

FINRA’s Watch List

FINRA’s yearly priorities letter is a list of the things it will be keeping a close eye on for the year. And as much as it is an inadvertent heads-up to broker-dealers, it is also a warning sign for investors. If FINRA is watching something, investors should be watching out for it.

This year, FINRA listed ten investments to watch:

Business Development Companies (BDCs): these are usually closed-end investment companies that invest in the debt and equity of private companies. BDCs typically offer a high-yield…but with that comes high credit and market risk exposure.

Leveraged Loan Products: leveraged loans are adjustable-rate loans given to low credit quality companies. Funds that invest in leveraged loans are marketed to investors as offering inflation protection and being less susceptible to interest rate movements (because of the floating rate loans), but they are vulnerable to credit risk because of the underlying loan quality.

Commercial Mortgage-Backed Securities (MBS): mortgage-backed securities are often marketed to retail investors without a clear explanation of the risk of these investments in today’s low interest rate environment.

High-Yield Debt Instruments: the high-yield debt market has drawn a lot of money over the past couple of years, and because price and yield move in opposite directions, when investors pile in cash, yields go down. High-yield bond funds saw record inflows last year – more than double the previous record of $31.8 billion in 2009. FINRA is also concerned about the fact that a wide range of companies with heavy funding needs have been issuing bonds, posing more credit risk.

Structured Products: structured products are securities that are tied to derivatives. They are complex, they are illiquid, and based on a promise of principal protection they are frequently marketed to retail investors who do not entirely understand them.

Exchange-Traded Funds and Notes: the proliferation of these products over the past few years has widened the investing landscape and opened doors to opportunities once out of reach for retail investors. But with those opportunities comes caution: investors may be unaware of the risks, particularly associated with leveraged exchange-traded products, and the multitude of new products flooding the market lack an established track record.

Non-Traded REITs: non-publically traded Real Estate Investment Trusts are littered with pitfalls that investors are often unaware of: high sales commissions, the repayment of principal as a dividend, and a lack of liquidity.

Closed-End Funds: closed-end funds attract investors with their distributions, but they can trade at significant premiums to their NAV as they may be returning capital to maintain the distribution rates that attract investors in the first place.

Municipal Securities: investors looking for a place to park money might be attracted to the muni market (the default rate on general obligation muni bonds is around 1%). But FINRA is concerned that brokers might not be disclosing the risks associated with other types of muni bonds that are not backed by the taxing power of the municipality (as general obligation munis are).

Variable Annuities: high commissions, high yearly expenses and illiquidity are a few of the many problems with variable annuities (which I have discussed on many occasions).

FINRA pointed out that this list is not meant to be exhaustive, and there are other things the agency will be watching in 2013. None the less, if an investment product makes it to the agency’s top ten list, investors should consider themselves warned.


bottom of page