FINRA Issues Regulatory Notice Relating to Complex Products and Options
15 March 2022
On March 8, 2022, FINRA issued its Regulatory Notice 22-08, which may be accessed here (the "Notice"). The Notice summarizes a significant portion of FINRA's prior guidance relating to customer transactions in complex products. In addition, the Notice solicits comments on a variety of related areas, including (1) effective practices that members have developed for selling complex products and options, particularly when retail investors are involved, and (2) whether FINRA's current regulatory framework is appropriate to address the issues raised by complex products and options.
In the Notice, FINRA cites market data indicating that structured products and options trading has grown significantly, rendering it appropriate for FINRA to continue to examine these areas. The Notice reflects FINRA's continuing concern as to whether structured products and other instruments are properly marketed to and purchased by retail investors who may not fully understand their features and risks.
Prior Guidance and Regulatory Actions
The Notice is useful reading to the extent that it summarizes some of its guidance since the 2003 Regulatory Notice relating to complex products, including the characteristics that render a product complex, and a variety of specific obligations that broker-dealers have when selling these products. The Notice identifies several additional types of newer products that are likely to be considered "complex," including so-called "defined outcome ETFs," and funds that provide exposure to cryptocurrency futures. The Notice also describes some of FINRA's recent enforcement actions relating to complex instruments, and identifies regulatory actions taken by both the SEC and non-U.S. regulators to address complex products. FINRA's focus on actions by non-U.S. regulators point to FINRA's willingness to consider the possibility of adopting U.S. regulations that are based in part on these models.
Request for Comment
The Notice's request for comment casts a somewhat broad and detailed net as to both current industry practices, and potential areas in which FINRA may revise or update its current rules:
- How to define "complex products".
- What practices relating to sales and supervision of complex products have been effective, including with respect to account approvals, investor eligibility and customer disclosures.
- Restrictions relating to the advertising of complex products.
- Training and supervision of financial advisors that offer complex products.
- Whether there are any regulatory developments in non-U.S. jurisdictions relating to complex products that should be considered for use in the U.S.
- Whether any procedures are needed with respect to self-directed accounts, in which retail investors may access complex products even without receiving a specific recommendation from a broker.
Conclusion
The broad nature of FINRA's request is designed to provide input to FINRA across the scope of its regulatory regime. The Notice requests comments from the public by May 9, 2022.
The Notice does not necessarily provide an indication as to any specific rule-making activity in which FINRA may engage. However, the Notice demonstrates that FINRA is ready to take a careful and detailed look at a variety of its regulatory requirements in this area, and whether they can be updated to more effectively protect investors.
Authors: Lloyd Harmetz, Partner, Margaret Sheehan, Partner and Tim Edmonds, Partner
