FINRA issues notice on alternative mutual funds

More than four years after the demise of an alternative mutual fund should have taught wealth managers a lesson, FINRA says some companies still haven’t learned it.

The February 2018 stock plunge, later dubbed the “Volmageddonwould have wiped out more than $1 billion of client assets who invested in the LJM Preservation & Growth Fund, an uncovered options-linked product that seeks to exploit the difference between implied volatility and actual volatility. Citing five surveillance cases between March 2021 and 2022 against companies whose Cambridge Investment Researchgroup of advisors Triad Advisors and Geneos Wealth ManagementFINRA said in an April 19 regulatory notice to remark that it “continues to note such shortcomings in its reviews and reviews of submissions of these products”.

“Alt Funds are registered open-end investment companies that seek to achieve their objectives by investing in non-traditional investments or asset classes. Industry players, including member firms, have marketed or recommended Alt Funds to retail clients as products with sophisticated, actively managed hedge fund-like strategies that will perform well in a variety of market environments,” the statement reads. regulatory alert.

“While these funds may be suitable for some investors,” he continues, “FINRA has always emphasized the importance of member firm sales practice obligations for these and other products, particularly where these products may entail additional risks for customers”.

Although the notice cites earlier warnings about alternative mutual funds such as an SEC investor alert in 2017 and FINRA review priorities letter from 2015, the latest offers a new reason for wealth managers to consider changes to their compliance protocol. FINRA’s advice should “apply to all complex or high-risk products” overseen under companies’ written oversight procedures, said consultant John Gebauer, chairman of ComplySci’s NRS.

“When reviewing their WSPs, firms need to consider whether they identify the types of customers that alternative mutual funds would be suitable for, how they should be supervised, and the systems/processes used to monitor such activity – things that your compliance technology should help you do,” Gebauer said in an email.

“Training and continuing education will continue to be an effective aspect of compliance training programs,” he said. “Understanding the risks associated with any alternative product offered by the company and the suitability considerations helps representatives and their supervisors understand what is expected.”

It could also save clients and businesses a lot of money, with the five acceptance, waiver and consent letters in the past two years cited by FINRA ordering combined fines and restitution in excess of $5 million.

Recent reviews and reviews of FINRA member communications have found insufficient scrutiny of companies’ public promotion of hedge funds and inadequate procedures and oversight, according to the regulator. The “effective practices” it observed include specific due diligence, documentation, sales restrictions, enhanced monitoring, increased monitoring and additional training for advisers and supervisors, according to the notice. The regulator has also provided a list of questions that could help companies consider any changes to their oversight practices.

“Companies should not infer new obligations from the issues to be considered and may wish to assess the issues set out below in the context of a risk-based approach depending on their business model,” the notice states.