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May 26, 2022
VOLATILITY TO SPARK INCREASED SCRUTINY OF COMPLEX PRODUCTS SALES, REGULATORS
WARN
by Miriam Rozen
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News
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Consumer Federation of America, FINRA, PIABA, SEC
|
Regulation
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Market volatility will expose brokerages that fail to supervise and ensure their
representatives adequately comply with Regulation Best Interest rules when they
pitch complex products, according to enforcement officials from regulatory
agencies.
“Make sure that you’re training your reps so that they understand the products
and how they work for people because otherwise they can’t make the
recommendation that they need to be making,” said Melissa Hodgman, associate
director of the Division of Enforcement at the Securities and Exchange
Commission, during a session at the Financial Industry Regulatory Authority’s
annual conference broadcast earlier this month from Washington, D.C.
The increasing market volatility puts pressure on some structured retail
products (a la ‘Volmageddon’ in 2018) that could see dramatic swings. It also
comes as sales of structured products are becoming more popular at brokerage
firms, according to Jessica Hopper, head of enforcement at Finra.
“We’re seeing more and more structured products being offered to more and more
retail investors,” Hopper said on the same panel presentation.
Hopper did not identify specific products, but Finra has spotlighted in
regulatory notices volatility-linked exchange-traded products, interest
rate-based “steepener notes,” defined outcome exchange-traded funds, and mutual
funds and ETFs using cryptocurrency-based strategies, among others.
The products raise concerns because they may appear that they are another mutual
fund, but brokers need to be aware of the options-based strategies behind many
of the investments, Hopper added.
“Firms are responsible for making sure that the representatives understand how
the products work, not just what the commission payout was,” Hopper explained.
In one recent enforcement example cited by the panel, Finra in March imposed a
censure and $150,000 fine against Centennial, Colorado-based independent
broker-dealer Geneos Wealth Management, and also required it to provide more
$250,000 in restitution to investors.
Geneos between November 2016 and February 2018, “failed to reasonably supervise
representatives’ recommendations of an alternative mutual fund” and establish
“procedures reasonably designed to ensure that the firm and its representatives
had a sufficient understanding” of the risks linked to a fund they were selling,
including that its strategy relied on purchasing uncovered options, Finra wrote
in a letter of acceptance, waiver, and consent. A Geneos representative signed
the letter without admitting or denying the allegations.
One of the Geneos brokers selling the fund conceded, “I don’t know how this
works,” according to Hopper and Hodgman, who both laughed while recounting his
remarks.
The warnings from regulatory officials come amid broad scrutiny of sales of
complex products, specifically leveraged and alternative ETFs.
Finra issued on May 9 a notice reminding firms of their supervisory obligations
with complex products and seeking comments about the existing and future
possible related regulatory proposals as retail purchases have “increased
significantly in recent years.”
Finra has not yet disclosed any final plans for a proposed rule change, but the
industry read the letter as fortelling a potential crackdown.
“We are concerned that prospective new regulatory requirements that have the
effect of restricting access to these products would deprive retail investors of
these products’ significant benefits,” Kevin Carroll, a managing director and
associate general counsel for the Securities Industry and Financial Markets
Association, wrote in a posted letter.
Investor advocates were more welcoming.
“The current regulatory framework for self-directed investment in complex
products and options is not appropriately tailored to address current concerns
raised by these products,” wrote Micah Hauptman, the Consumer Federation of
America’s director of Investor Protection, in a comment letter.
Finra is still at the early stages of any rulemaking, an official said.
“We’re at the beginning of this process, and that is there’s a lot of iteration
yet to happen,” Nathaniel Stankard, senior advisor to Finra’s CEO, told an
audience at another session of the same conference.
WALL STREET REGULATORS CONSIDER ‘STAGGERING’ CURBS ON COMPLEX ETFS
Wall Street watchdogs and issuers of “complex” exchange-traded products are
headed for a showdown as regulators weigh tough and far-reaching rules to curb
retail investor access.
May 3, 2022
In "News"
INDUSTRY TRADE GROUP HOPES MASSACHUSETTS RULING WILL QUELL STATE FIDUCIARY RULES
A state court’s ruling in a pivotal case brought by Robinhood Financial could
“scare” other states away from promulgating their own standards of care for
brokers.
Apr 7, 2022
In "News"
SEC TELLS BROKERS TO BE ‘VIGILANT’ AS VOLATILITY GRIPS MARKETS
The U.S. Securities and Exchange Commission is warning brokerages to be vigilant
in watching out for trading risks amid increased volatility in global markets.
Mar 14, 2022
In "Most Read"
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