The Financial Industry Regulatory Authority (FINRA) has requested information from several brokerage firms in an investigation of marketing and sales practices in the mortgage industry.
This investigation is the second leg of a broad sweep intended to review industry practices and ensure that brokers have followed risk-disclosure rules. Under FINRA rules, marketing and sales materials have to display investment risks as prominently as they display potential benefits.
The requests, mailed in December to a range of Wall Street businesses, ask firms to send in marketing materials and supervisory policies as well as explanations of how collateralized mortgage obligations (CMO) were valued.
Herb Perone, associate VP for media relations at FINRA, said the contacted firms were chosen because they represented a cross-section of the CMO market — not because they were under suspicion of wrongdoing.
“We’re a regulatory body, and it’s absolutely common for us to do this kind of fact-finding investigation whenever a security product that had been pretty much the exclusive province of institutional investors works its way into the retail market,” Perone elaborated. “We have advertising rules that in essence require that any advertisement of a product be fair and balanced, and advertising and marketing materials have to disclose risks as well as the potential upside of the investment.”
There have been some reports that the point of this FINRA sweep was to see if firms were unfairly targeting senior citizens with CMO offers. However, Perone said there was no precipitating event that led to the investigation and that sweeps are performed all the time.
“We’re just canvassing the marketplace to see how sales are being conducted, and how the materials are being written and presented,” he said. “If we collect that kind of information and know industry practices, we want to review them before there’s a problem.”
Because the investigation is ongoing, no firms or industry practices have been affected yet.
“We may find that there’s nothing to worry about,” Perone concluded. “Or, we may find that there are deficiencies. We might have to put out guidelines for firms, or there may be some enforcement needed.”
