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Concentrated Position Risk Drawing Regulatory Scrutiny

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that “maintained customer accounts that were concentrated in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trust (“REITs”), which were unsuitable for customers and resulted in significant customer losses.”

A concentrated account is commonly considered to be an account which contains a significant percentage of its assets in one product, type of product or sector which exposes the account to excessive amounts of risk – especially during periods of extreme volatility as the markets have recently experienced in greater frequency.

In particular, FINRA noted that “some registered representatives recommended structured notes or sector-specific investment strategies to customers who may not have had the sophistication to understand their features and without considering the customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors.”

Some of the “recommendations involved illiquid securities with limited price transparency, which made it difficult for investors to know the true value of their investment and led them to believe that their investments would not fluctuate in value. In some instances, firms did not have procedures or systems reasonably designed to identify and supervise the concentration of such products in customers’ accounts.”

If you are an individual or institutional investor who has any concerns about your concentrated investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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