Finra focuses on sales of complex products, crypto

Finra is poised to beef up rules surrounding sales of complex products and to enhance safeguards related to purchasing cryptocurrencies and digital assets from brokerages.

Those items are among the organization’s 2022 priorities, Robert W. Cook, CEO of the Financial Industry Regulatory Authority Inc., said Wednesday.

“A theme of a lot of what we’ll be doing this year is going to be around retail investor protection issues, particularly in light of the surge of retail investors we’ve seen come into the markets in recent years,” Cook said during a Securities Industry and Financial Markets Association webinar.

As more ordinary investors pile into the market, they’re doing so in part through risky investments, such as options, that they're more easily able to access through online trading platforms.  

Last year, Finra launched an exam sweep focusing on how its member brokerages recommend and monitor options accounts. It’s looking to expand on that effort this year.

The broker-dealer self-regulator is likely to update its rules for options accounts, Cook said. It also will review regulation of complex products generally.

“We’ve talked a little bit about this in the past, but we’re getting closer to being able to solicit comment on what we ought to be doing in this space,” he said.

Finra also will take a look at sales of cryptocurrencies and digital assets by its member firms, which could result in stronger advertising and disclosure requirements.

Cook stressed that Finra isn't delving into how cryptocurrencies are regulated. That’s a matter for the Securities and Exchange Commission and other regulators to sort out.

Finra is concentrating on what happens when investors purchase cryptocurrency or a digital asset through registered representatives. The regulator will consider whether additional safeguards are needed when a customer conducts transactions involving both traditional securities and crypto, a situation where different regulations apply to the products.

“Investors may not know they are flipping out of the broker-dealer regime into a different regime because they’re dealing with the same broker-dealer,” Cook said.

Another item on the Finra agenda is to amend a recently implemented high-risk-broker rule to require firms that receive the designation to disclose it on their BrokerCheck profiles.

Finra will assess liquidity risk management practices by its member firms, a topic that has come up in relation to last year’s meme-stock trading frenzy.

The regulator also is going to consider updating its rule book based on lessons learned during the coronavirus pandemic. For instance, Finra has allowed brokerages to conduct remote compliance inspections, a policy that might be extended beyond this year. Another pandemic adjustment that could become permanent is the option for remote arbitration hearings.

The new broker-dealer standard of conduct, Regulation Best Interest, went into force in June 2020. Finra will reevaluate some of its rules that were in existence before Reg BI to see whether they need to stay on the books or if they’ve been superseded by the measure.