FINRA Seeks Input on Further Regulation of "Complex" Products
Commentary by Steven Lofchie
FINRA is seeking input on further measures that FINRA might impose on the sale of "complex" financial products.
In Regulatory Notice 22-08, FINRA provided examples of products that may be considered complex, including:
- options (both puts and calls);
- products with embedded options;
- reverse convertibles;
- funds linked to commodities;
- funds that include cryptocurrencies;
- numerous asset-backed securities;
- products on which the payout depends on the price relationship of two other products;
- products that have embedded leverage; and
- products that may be volatile.
FINRA 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 suggested that it may impose significant sales regulation on such complex products. Potential regulations could include, among others: (i) specific suitability requirements as to products, (ii) tests of an investor's knowledge and experience, (iii) specific principal registration and supervision requirements, (iv) position limits, (v) factors that must be considered in recommending the product, (vi) requirements as to the training of registered representatives, (vii) additional account opening procedures, and (viii) new disclosure requirements.
FINRA also indicated that it could seek to impose restrictions on self-directed accounts where no recommendation is made to an investor.
Comments are due by May 9, 2022.
Commentary
This FINRA request is very significant and should attract broad comment. It raises material policy issues including the extent to which federal securities regulation is to be transformed from a system based on disclosure, to one in which the regulators may effectively disapprove products that they do not like by imposing burdensome regulations on their sale, thereby, making them uneconomic.