FINRA notice reminds firms of obligations regarding alternative mutual funds

On Behalf of | Apr 27, 2022 | FINRA Compliance

The Financial Industry Regulatory Authority has issued a notice reminding member firms of their obligations when it comes to alternative mutual funds, InvestmentNews reports.

In Regulatory Notice 22-11, FINRA outlined its findings from recent examinations and enforcement matters involving the funds, also known as “alt funds” or “liquid alts”. These are described as open-end registered investment companies that seek to achieve their objectives through investments in non-traditional investments or asset classes.

The authority said it has taken recent enforcement action against several firms for failing to establish or maintain a reasonably designed supervisory system for recommendations of alt funds. FINRA said it has continued to find such deficiencies in its examinations and reviews of these products.

FINRA said member firms must fulfill their sales practice obligations for these and other products, especially when they may carry additional risks for customers. In its recent reviews, the authority said it has found inadequate written supervisory procedures, inadequate alt funds oversight, and insufficient review of communications with the public by certain firms.

It also determined that some firms did not conduct reasonable diligence and sold alt funds without a sufficient understanding of their risks and features. In addition, some firms have failed to take into account customer risk tolerance in setting limits on recommendations of such funds.

FINRA detailed certain effective practices that some firms have used in their alt fund recommendations, including enhanced oversight and surveillance, training and educating their staffs on compliance, voluntarily filing communications to the public with FINRA ahead of use, restricting sales of the funds to certain customers, and ongoing evaluations of alt funds.

The attorneys at Lewitas Hyman include former senior attorneys at the SEC whose legal experience and industry knowledge make them uniquely qualified to provide counsel on securities regulatory, compliance and enforcement matters. Additionally, we regularly monitor SEC, FINRA and other SRO rule-making activities to help ensure that our clients are aware of any new policies, while assisting them in implementing any recommended changes. If your firm is facing an investigation from a regulatory agency, please contact Lewitas Hyman at (888) 655 6002 or through our online contact form.  

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