FINRA Concerned About--Non-Traded REITs, BDCs, ETFs

Each year the Financial Industry Regulatory Authority (FINRA) publishes a letter highlighting the areas of significance to its regulatory endeavor. This year, the letter discusses concern regarding whether or not complex investment products are suitable.

The specific products enumerated in the letter are not new to any of us. Most have been around, and in some cases, causing problems for retirees attempting to live on fixed income, for quite a while.  The products considered complex and potentially unsuitable are:

Business Development Companies (BDCs)-typically closed end investment companies. Some invest in the corporate debt and equity of private companies and may offer high yields through leverage related risk. FS Investment Corp, Corporate Capital Trust, FS Energy Power Fund, Business Development Corp. of America, VII Peaks, Sierra Income Fund and HMS Income Fund are some of the largest BDCs.

Leveraged Loan Products- these are adjustable-rate loans offered by finanical institutions. They have low credit quality and a high debt to equity ratio. According to FINRA, since August 2012, the funds have taken in more than $5 billion.

Commercial Mortgage-Backed Securities (MBS)- FINRA has a heightened concern about the sale of these fixed-income instruments to retail investors (mom and pop). FINRA's concern is that the selling companies are not doing enough to apprise buyers of the potential risks.

High Yield Debt Instruments- In September 2012 investors put nearly $9 billion into high yield bond funds.

Exchange Traded Funds and Notes- (ETFs and ETNs) FINRA is concerned retail investors may not understand the differences among exchange-traded index products and that selling brokers may have some confusion as well.

Non-Traded REITs- Investors have been alerted to the problems with these investments, which include REITs like, Behringer Harvard, KBS. Dividend Captial, CNL Lifestyle, Wells, Hines, Inland American & Inland Western for quite a while now. FINRA is concerned purchasers may not fully understand sales costs charged and that distributions may come from principal (ie; your own money) rather than income.

The letter also expresses concern about the sale of Closed-End Funds, Municipal Securities and Variable Annuities. With regard to annuities, the concern is whether the investment is suitable, whether the broker himself understands the product, the liquidity needs of the purchaser and the adequacy of risk disclosure.

If you have questions about losses in your brokerage account, please do not hesitate to contact us. We have been helping investors recover stock market losses for 25 years.

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