FINRA May Limit Self-Directed Investment in Complex Products

On 8 March 2022, the Financial Industry Regulatory Authority, Inc. (FINRA) issued Notice to Members No. 22-08 (NtM 22-08) to “remind members of their sales practice obligations” for complex products and options and to “solicit comment” on effective practices and “rule enhancements” related to complex products.1

For purposes of NtM 22-08, what constitutes a “complex product” is critically important. Unfortunately, as FINRA acknowledges in the NtM, “[t]here is currently no standard definition of a ‘complex product.’” Rather, provides only a description based on prior FINRA discussions of products it perceived to be complex. Specifically, “FINRA has described a complex product as a product with features that may make it difficult for a retail investor to understand the essential characteristics of the product and its risks.” 

In prior releases, FINRA has described each of the following types of products as complex: 

Closed-end funds Target date funds Emerging market funds
ESG funds Smart beta index funds Cryptocurrency futures funds
High-yield bond funds Funds using derivatives for hedging Cryptocurrency trusts
Multi-strategy funds Funds using derivatives for leverage Commodity funds
Business development companies  Geared (leveraged or inverse) funds Currency funds
Variable annuities Funds selling short Insurance-linked securities
Market-linked Certificates of Deposit Absolute return funds Asset-backed securities
Unconstrained bond funds Distressed debt funds Non-traded Real Estate Investment Trusts
Floating rate loan funds Volatility-linked funds Global real estate funds
Interval funds Defined outcome funds Reverse convertible notes
Funds of hedge funds Principal protected notes Exchange-traded notes

In effect, under this description only plain vanilla index funds and certain long-only U.S. or developed market funds escape categorization as “complex.” As a result, nearly every broker-dealer selling or making available exchange-traded funds,…

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