What do you do when you add a new product to your firm’s approved offering listing? How do your reps know that a new product has been added? Do your policies & procedures even address new products? What sort of training do you provide? Does your firm need to file a Continuing Membership Application (Form CMA)? As a compliance specialist for FINRA-registered broker-dealers, we encounter these type of questions from our clients on a regular basis, including FINRA, SEC, and MSRB compliance veterans.
New Product Policies and Procedures
FINRA urges firms to take a proactive approach to reviewing and improving their policies & procedures for developing and vetting new products. At a minimum, your firm’s policies & procedures should include clear, specific guidelines for determining what constitutes a new product. Clear guidelines ensure that the right questions (such as whether additional FINRA registration and/or insurance licensing will be needed) are asked and answered during the due diligence review period and prior to a new product being approved and offered for sale. Clear guidelines also provide for post-approval follow-up and review, when appropriate, particularly for products that are complex in nature or are approved only for limited distribution.
While suitability requirements and other sales practice obligations attach to the recommendation and sale of a product, adequate policies & procedures for reviewing new products before they are offered to the public can greatly enhance a firm’s ability to detect and avoid conflicts, unsuitable recommendations, and other such problems before violations occur. As always, effective implementation of your firm’s policies & procedures is crucial. Even the best policies & procedures are useless if they are not followed.
New Product Review Process
The New Product Review Process should entail a number of items, starting with a review of your firm’s Membership Agreement with FINRA, in order to determine whether a Form CMA broker-dealer application is needed. It is imperative to confirm that your firm is approved to sell the new product before your reps offer it to your clients. If you are approved for VAs and mutual funds, you can’t just start selling hedge funds because your rep in California wants to. Your firm must be approved to sell the product.
If there is a question about whether or not a product type falls within the category of any approved business on your Membership Agreement, a FINRA filing called a Materiality Consultation can be submitted for a determination. In order to maintain FINRA compliance with required regulatory filings, it is wise to ensure that your firm can conduct an activity and sell a certain product, rather than finding out during your next FINRA regulatory examination that you have been conducting an unapproved activity or, even worse, answering a regulatory inquiry when a customer complaint is received.
New Product Risk Assessment
In addition, the firm’s Chief Compliance Officer (CCO), or another designated Supervising Principal, should certify that a thorough risk assessment and due diligence analysis has been conducted on the new product. Who is the issuer or investment company? What is their track record? Do they have experience with this type of investment offering? What are the inherent risks involved with the product? Who is it suitable for – retail investors, accredited investors, institutions only? What is the time horizon? Are there conflicts of interest that need to be considered? How liquid is the product? Is there a secondary market for it? Will the firm require additional systems or tools for monitoring purposes? All of these questions and more should be included in your analysis of the new product.
Once a new product’s risk assessment and due diligence analysis has been completed and added to the approved offerings for your firm, your firm’s analysis should not stop; a post-approval risk assessment and analysis may be warranted in order to maintain broker-dealer compliance – especially for complex products or those with limitations imposed on them. Have there been any customer complaints related to the new product? If so, how many? How is the new product performing? Have the risks changed due to market condition changes? Is a suitability re-assessment in order? Is the new product being sold within the firm’s policies & procedures?
New Product Training
Finally, have all persons involved completed any FINRA registration and/or licensing requirements? Is additional guidance needed? Has appropriate continuing education training been conducted? It is important to note: your firm should require training on any new product prior to your reps selling them. Educating your reps on the new product and its characteristics, regardless of the similarity to other products, is essential. Moreover, you must document that the training was conducted, as well. If you don’t have proof, the training didn’t occur.
