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FINRA Cautions Against Chasing High Yields In A Low Rate Environment

By George Miller of Shustak Reynolds & Partners, P.C. posted on Thursday, February 2, 2012.

In January, the Federal Reserve announced it will keep interest rates low until at least late 2014 in a continued effort to buttress the fledgling economic recovery. In what has become a market dominated by low interest rates, yields on Treasuries also are expected to remain low for at least the next two years. Recognizing a renewed incentive to chase higher yields offered by riskier, exotic investment products, FINRA recently issued a detailed letter to registered representatives and their firms cautioning against some of the pitfalls of these investments.

According to FINRA, the current low interest rate environment has “steadily contributed to conditions that foster an increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings, and misappropriation and fraud.” FINRA singled out several products of particular concern, including residential and commercial mortgage backed securities, non-traded investments in Real Estate Investment Trusts (REITs), municipal securities, complex exchange-traded products, variable annuities, church bonds and several other risky, complex investments.

Many of these investments do not offer complete or timely disclosures of all risks associated with the investment or are so complicated investors may be unable to understand the risk-versus-reward tradeoff of the investment even with full disclosures. In addition, many of these securities are historical vehicles for financial abuse or fraud. Recognizing these risks, FINRA recently released Notice to Members 12-03, which imposes heightened supervisory and compliance obligations on firms who offer certain complex investments like these.

If you think you have been recommended an unsuitable investment, you may contact our managing partner, Erwin Shustak, at (619) 696-9500 or [email protected]. Our firmcurrently is handling a number of claims on behalf of investors involving unsuitable, complex investments.

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