Finra is about to launch an initiative that could lead to tougher rules governing the sales of complicated investments that are pitched as a way to increase returns but can be beyond the understanding of an ordinary investor.
“We’ve been looking closely at the offering of complex products by our member firms,” Financial Industry Regulatory Authority Inc. Chief Executive Robert W. Cook said Monday at a conference hosted by the New York University Law School’s Ronald H. Filler Institute for Financial Services Law. “We’re close to issuing a [regulatory] notice that would solicit views about whether this area of our rulebook needs to be updated.”
As an example, Cook pointed to options trading, noting that in the past, retail investors could only make such transactions through a financial professional. Today, they can engage in online options trading on their own.
“Do the rules that we have in place provide the appropriate safeguards for investors there?” Cook asked. “We certainly want to preserve and encourage investor access to the markets, but do we have the right set of rules there?”
Options trading is one of several areas where Finra recently has launched exam sweeps. Other probes focus on brokerages’ activity involving special purpose acquisition companies and brokers’ use of social media.
The broker-dealer self-regulator is initiating its review as the Securities and Exchange Commission begins a study of the risks posed by complex exchange-traded products.
SEC Chairman Gary Gensler announced earlier this month that he's asked agency staff to present recommendations to the commission on how to address potential investor harm.
“I believe that potential rulemaking could strengthen the investor protections around these products,” Gensler said in an Oct. 4 statement.
SEC commissioners Allison Herren Lee and Caroline Crenshaw said the SEC should update rules for complex exchange-traded products, such as leveraged and inverse ETFs, given their proliferation in recent years.
“[T]he Commission should adopt and implement a tailored sales practices framework that applies to the recommendation and trading of complex exchange-traded products commensurate with the risks these products present,” Lee and Crenshaw said in an Oct. 4 statement. “Many exchange-traded products have features that may make it difficult for investors—and even financial professionals—to understand their characteristics and risks.”
Gensler, Lee and Crenshaw are all Democratic commissioners and represent the majority on the five-member SEC.
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