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Industry Weighs FINRA Proposal to Further Restrict Investor Access to "Complex Products"'s picture
Commentary by Nick Allen

In response to a request for comment on FINRA Regulatory Notice 22-08, several industry organizations and a cohort of attorneys general submitted letters examining the merit of FINRA's proposal to further restrict retail investors' access to "complex products."

As previously covered, FINRA suggested that it may impose significant sales regulation on a variety of products, but did not provide a definition of the term "complex product" other than that it has features that may "make it difficult for retail investors to understand." FINRA also indicated that it could seek to impose restrictions on self-directed accounts where no recommendation is made to an investor.


SIFMA opposed additional regulatory requirements on complex products, expressing concern that further regulation would deprive retail investors of the benefits of these financial instruments. SIFMA asserted that existing rules, such as Regulation BI, already sufficiently regulate access to these products. SIFMA stated that FINRA should continue to allow firms to establish their own eligibility requirements based on the firm's specific clientele, supervisory systems and product offerings. Further, SIFMA highlighted that neither FINRA nor the SEC has defined the term "complex product," adding that any definition should (i) be defined consistently, objectively and narrowly, and (ii) be applied in advance to any new product designated as "complex" through the traditional notice and comment rulemaking process.


SIFMA AMG stated that FINRA lacks the authority to impose the limits it is suggesting on investor access to complex products because FINRA’s statutory focus is on the regulation of broker-dealers, not on the regulation of decisions by investors themselves. SIFMA AMG also urged FINRA to conduct additional research prior to enforcing any further restrictions, but stated any additional restrictions would potentially harm investors. Additionally, SIFMA AMG criticized FINRA for suggesting restrictive regulation of complex products without providing a sufficient definition or a sufficient factual basis for imposing these access limits.

Investment Company Institute

The Investment Company Institute said that additional restrictions on customer purchases are unnecessary because "[f]unds already are subject to substantive regulations aimed at protecting retail investors." ICI stated that these regulations, in conjunction with existing suitability obligations and the broker-dealer best interest standard, provide a "robust regulatory framework." ICI also noted that any such restrictions "would undermine the current disclosure-based securities law framework."

The Heritage Foundation

The Heritage Foundation opposed further restricting investor access to complex products and called FINRA's proposal inadvisable and "inconsistent with both the disclosure principles of federal securities law and its own stated purposes." The foundation asserted that "merit review" is inconsistent with the disclosure principles of federal securities laws and FINRA’s own purpose, stating that systemic risk is not an appropriate justification for FINRA to act.

Attorneys General

A group of 12 attorneys general urged FINRA to withdraw the Notice entirely, as well as the request for comment. The group questioned FINRA's decision to restrict investor access to complex products. Moreover, the group suggested that FINRA conduct additional research, beginning with a definition of "complex product," and then determine whether it has the proper authority to regulate investor access, if at all.


NASAA suggested that current safeguards are "inadequate" as to the marketing and sale of complex products to retail investors. NASAA recommended several measures that FINRA could require to ensure members firms and their representatives "fully understand the products they are offering." NASAA also called for a prohibition on the "indiscriminate marketing of complex products and strategies to retail investors."


Many of these comments highlight that this FINRA request has as much to do with the rise of "retail" investors as it does with "complex products" (whatever that would ultimately mean). The proposals in FINRA's request would fundamentally transform securities regulation: from a disclosure-based regime to a regulator-determined merit-based one; and from one where broker-dealer interactions with investors are regulated to one where, in effect, investors themselves are regulated.

As many noted, at minimum, any such foundational changes by FINRA and the SEC should only be effected through the traditional notice and comment rulemaking process.

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