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FINRA Target Exam Letter - VIX-Linked Product Review

Posted on April 10, 2018 at 1:50 PM

FINRA is conducting a review with respect to products linked to the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The review will focus on the supervisory processes followed by the firm to identify and mitigate sales practice risks associated with recommendations to non-institutional purchasers of VIX-linked products (VIX-linked Products) including, but not limited to, 

  • unsuitable recommendations,
  • misrepresentations, and 
  • appropriateness of any required disclosures to customers. 

Member Regulation will also assess the firm’s supervisory controls with respect to product vetting, testing, and approval (i.e., due diligence) in this space. Firms may be asked the following documents and information applicable to the period October 1, 2017 through February 28, 2018 (the Review Period), unless otherwise noted below, by no later than April 20, 2018:

  • Written Supervisory Procedures (WSP), 
  • compliance manuals, 
  • training materials, 
  • any other written guidance given to its registered persons regarding the solicitation, recommendation, and supervision of VIX-linked Products during the period January 1, 2016 through the date of this letter, and
  • documents governing the Firm’s product due diligence process, disclosures and representations to customers; and customer specific and reasonable basis suitability process for VIX-linked Products recommended to the firm’s non-institutional customers during the Review Period. 

In addition, in Excel format, the following lists must be provided, by gross commissions generated related to VIX-linked Product purchase/sale activity for the Review Period:

  • Top 25 branch offices (include CRD #);
  • Top 25 registered representatives (include CRD #); and
  • Top 25 retail customers accounts (single account focused) (include account number(s) and assigned registered representative); and
  • Top 25 retail customers based upon activity within their ‘household’ (include account number(s) and assigned registered representative, including where there are multiple accounts linked to a customer household).
  • An electronic copy of all VIX-linked securities transactions effected within accounts of non-institutional customers during the Review Period, pulled from the firm’s purchase and sales blotter. In connection with this request, please provide the following data elements in MS Excel or CSV format for all relevant securities transactions during the Review Period.

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Categories: Fair Dealing, General