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(Article from Registered Funds Regulatory Update, July 2022)

For more information, please visit the Registered Funds Resource Center.

On March 8, 2022, FINRA issued a Regulatory Notice reminding members of their sales practice obligations regarding complex products and soliciting comments on effective sales practices and rules to help mitigate risks for retail investors. FINRA highlighted the significant increase in retail trading of complex products and noted that complex products can affect underlying assets and operate in unanticipated ways when markets experience volatility or stress conditions.

FINRA reminded members of their responsibilities to scrutinize complex products and described sanctions it recently levied in relation to such products, including against members that:

• failed to reasonably supervise brokers’ recommendations of leveraged, inverse, and volatility-linked ETPs, leading to unsuitable recommendations of these products that caused customer losses;
• failed to reasonably supervise a broker who recommended that customers liquidate their retirement accounts and invest the proceeds in speculative and illiquid securities;
• failed to reasonably supervise a broker who recommended that customers concentrate their accounts in an inverse floating rate collateralized mortgage obligation, resulting in more than $2 million in losses; and
• recommended concentrated investments in high-risk business development companies, resulting in more than $1 million in losses.

FINRA also included a request for comment on several questions related to the increase in, and risks of, retail trading of complex investment products.

FINRA Reminds Members of Their Sales Practice Obligations for Complex Products and Options and Solicits Comment on Effective Practices and Rule Enhancements, FINRA Regulatory Notice 22-08, available at: https://www.finra.org/rules-guidance/notices/22-08#notice.