The U.S. Financial Industry Regulatory Authority (FINRA) is warning brokerage firms about investor protection issues that arise in transactions that involve pensioners selling their income streams to investors in exchange for an upfront lump sum payment.
FINRA issued a regulatory notice on Tuesday that highlights its concerns with these sorts of transactions, and provides guidance to firms on their responsibilities.
Among other things, the notice recommends that firms adopt special training and oversight procedures for these sorts of products, consider banning them altogether, or adopt a list of acceptable products.
Whether a particular pension income stream product is considered a security revolves around the specific facts of the product, the notice explains. It warns that there can be “significant consequences if a firm incorrectly treats a pension income stream product as not being a security.” This can include supervisory failures, and violations of qualification and registration requirements.
“Pension income stream products are complex and potentially present a number of investor-protection issues, such as significant commissions, lack of liquidity, and inadequate disclosure of how these contracts actually work, including risks for the pensioner,” says Richard Ketchum, chairman and CEO of FINRA, in a statement.
“FINRA member firms need to be mindful of their obligation to properly assess these products and supervise their sale to pensioners,” he adds.