Rick Ketchum, Chairman and CEO of FINRA, worries about the increasing availability of complex and sophisticated products to retail investors - over 8,000 retail structured products were sold in 2010.  He sees a greater likelihood that firms and their registered persons will lack a solid understanding of an investment product, which can weaken suitability analysis and sound sales practices. 

Fortunately, Mr. Ketchum offered examples of how some firms are addressing these issues. [C-I Note:  One can anticipate that FINRA examiners will look to see which, if any of these controls and measures firms have employed.

1.  Needing a solid understanding of an investment product, many firms have enhanced their product training programs.  Effective supervision is rooted in a thorough understanding of the product risks, coupled with robust broker training regarding the clients for whom the product is appropriate.  Brokers shouldn't rely on firm approval alone to satisfy their suitability obligations.

2.  Many firms have established new product committees to vet new products and determine which ones they will prohibit.  The best review programs are dynamic, and require that the firm monitor market and economic conditions that could change the firm's view about the appropriateness or suitability of a particular product.

3.  Some firms require retail customers who are interested in purchasing complex products to complete an option account approval process.  Some prequalify retail customers and require them to sign specialized investor qualification agreements.  These agreements may explain product features and risks in plain English, and require customers to attest to having read the materials provided, understanding the risks and wanting to invest in the product.

4.  With FINRA's continued focus on Reg D offerings, firms are carefully monitoring those individuals who are responsible for due diligence on Reg D offerings, and ensure that individual reps have a reasonable basis for suitability if they sell a product in the face of red flags.

For Mr. Ketchum's complete speech, go to:   [FINRA Speeches, 5/24/11]