Articles Posted in Investor Education

We are continuing our discussion of FINRA’s 2021 Report on Risk Monitoring and Examination Activities. In Part Two, we will focus on FINRA’s comments and findings related to Variable Annuities, Outside Business Activities, and Private Securities Transactions and Private Placements. These are all areas of interest that directly affect retail investors, and in which FINRA found deficiencies following its examination of member-firms. 

If you are interested in FINRA’s comments regarding Regulation Best Interest (Reg BI), Communications with the Public, and Best Execution, you can read Part One of our discussion here.

Variable Annuities

Earlier this week, FINRA released its 2021 Report on Risk Monitoring and Examination Activities. The Report replaced two of FINRA’s prior publications – FINRA’s Examination Findings and Observations Report and FINRA’s Risk Monitoring and Examination Priorities Letter. The Report provided an in-depth look at FINRA’s priorities, recommended best practices for broker-dealer members, and regulatory findings. The Report reiterated FINRA’s commitment to protecting senior and vulnerable investors and highlighted several important areas of interest that directly affect retail investors, including:

  • Regulation Best Interest (Reg BI)
  • Communications with the Public

Investing your money is a great way to grow your wealth, save for retirement, and reach your financial goals.  If you invest in the appropriate products, you can also receive income from investments, build on-pre-tax dollars, or reduce taxable income.

If you do not invest, you miss out on opportunities to increase your wealth.  However, all investments carry risk, and when you invest, you have the potential to lose money.

There are many different types of investments.  Some common types of investments include stocks, bonds, certificates of deposit, mutual funds, money market funds, exchange-traded funds, and annuities.  There are also more complex investment vehicles, such as real estate investment trusts (REITs), unit investment trusts (UITs), hedge funds, commodities, and private placements.

An in and out trading strategy refers to short-term trading in an investor’s account. In other words, buying in and selling out of securities in a short period of time with no real basis for the stockbroker’s recommendation in either the suitability of the securities or the trading strategy.

In and out is a trading strategy that is commonly associated with day trading. While the strategy may be suitable for some investors or desired by other investors, it is a highly speculative trading strategy for most retail investors. A staple of the strategy is that it generates fees and commissions for the stockbroker and the broker-dealer while costing the investor money. Generally, the investor will be hit with high per-trade transaction costs and even principal losses if the stockbroker is selling investments at a loss in order to engage in the strategy. In and out trading is not appropriate for most investors, and stockbrokers should, at a minimum, have a reasonable basis to recommend this strategy to a particular investor.

Under FINRA rules, a stockbroker is required to perform reasonable due diligence to understand two key areas: 1) the stockbroker’s in and out trading strategy recommendation and 2) the impact the stockbroker’s recommendation has on the account’s ability to turn a profit. To do so, it must assess the cumulative impact that commissions and fees associated with an in and out trading strategy will have on an investor’s ability to earn a profit. Failure to observe these considerations about the quantitative suitability of the trades may lead to investor claims against a stockbroker for unsuitable and excessive trading. Investors may also have a failure to supervise claim against the broker-dealer firm if the trading activity in an account warranted further review by a supervisor, if the trading exceeded turnover and cost-to-equity ratios, and if the broker-dealer failed to take action or ignored its own system’s alerts.

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