I am hereby writing to object to the rule enhancement articulated on Regulatory Notice 22-08, which proposes a restriction on investors' ability to trade complex products and options.
I clearly understand your concern about investors making uninformed investment decisions on options and complex products specifically to leveraged or inverse exchange-traded products. However, a restriction on trading complex products will do more harms than goods.
First, the existing FINRA rules are sufficient in protecting investors' decisions on complex products and options. The current FINRA rule 2210 (d)(1)(d) requires members to provide clear and non-misleading statements on risk and potential benefits including leveraged and inverse ETPs. In addition to that, FINRA rule 3010 ensures that members establish an appropriate supervisory system to confirm all FINRA and SEC rules are followed when recommending any products including leveraged and inverse ETPs. For options, FINRA rules 2220 and 2360 have more substantial and demanding requirements for members. The existing rules already ensure members provide a clear description of risks concerning investments in complex products and options. A review from the Advertising Regulation Department of FINRA for recommendations of complex products as described on the notice can be implemented but it seems unnecessary given the current FINRA rules.
Second, restrictions on investors' ability to trade complex products and options may create an unintended consequence, a shift in investment decisions into other risky products. If restrictions were imposed, investors who seek to enhance returns will attempt to trade in other products (e.g. penny stock) which possibly have a higher risk. Restriction such as limiting access to high net-worth retail customers seems unreasonable, as fluctuations in prices appear more significantly in proportion to low net-worth customers. The potential unintended consequences may harm low net-worth customers, and exacerbate the concerns.
Third, policies requiring retail customer attestations regarding knowledge of complex products are unhelpful as unqualified customers will continue searching for products that enhance returns, and may make even more uninformed investment decisions. A similar version of the unintended consequence mentioned may be replicated by policies that require customers to possess the relevant requisite understanding. However, regulations can be established to promote or recommend members to provide a more comprehensive guide on trading complex products and options. Customers will be able to acquire more information regarding complex products and options.
For the reasons above, I object to the rule enhancement articulated on Regulatory Notice 22-08. Nevertheless, FINRA can consider a relatively relaxed approach (i.e. recommending members provide a wide range of information on trading complex products and options).
Andy Lau Comment On Regulatory Notice 22-08
Dear FINRA,
I am hereby writing to object to the rule enhancement articulated on Regulatory Notice 22-08, which proposes a restriction on investors' ability to trade complex products and options.
I clearly understand your concern about investors making uninformed investment decisions on options and complex products specifically to leveraged or inverse exchange-traded products. However, a restriction on trading complex products will do more harms than goods.
First, the existing FINRA rules are sufficient in protecting investors' decisions on complex products and options. The current FINRA rule 2210 (d)(1)(d) requires members to provide clear and non-misleading statements on risk and potential benefits including leveraged and inverse ETPs. In addition to that, FINRA rule 3010 ensures that members establish an appropriate supervisory system to confirm all FINRA and SEC rules are followed when recommending any products including leveraged and inverse ETPs. For options, FINRA rules 2220 and 2360 have more substantial and demanding requirements for members. The existing rules already ensure members provide a clear description of risks concerning investments in complex products and options. A review from the Advertising Regulation Department of FINRA for recommendations of complex products as described on the notice can be implemented but it seems unnecessary given the current FINRA rules.
Second, restrictions on investors' ability to trade complex products and options may create an unintended consequence, a shift in investment decisions into other risky products. If restrictions were imposed, investors who seek to enhance returns will attempt to trade in other products (e.g. penny stock) which possibly have a higher risk. Restriction such as limiting access to high net-worth retail customers seems unreasonable, as fluctuations in prices appear more significantly in proportion to low net-worth customers. The potential unintended consequences may harm low net-worth customers, and exacerbate the concerns.
Third, policies requiring retail customer attestations regarding knowledge of complex products are unhelpful as unqualified customers will continue searching for products that enhance returns, and may make even more uninformed investment decisions. A similar version of the unintended consequence mentioned may be replicated by policies that require customers to possess the relevant requisite understanding. However, regulations can be established to promote or recommend members to provide a more comprehensive guide on trading complex products and options. Customers will be able to acquire more information regarding complex products and options.
For the reasons above, I object to the rule enhancement articulated on Regulatory Notice 22-08. Nevertheless, FINRA can consider a relatively relaxed approach (i.e. recommending members provide a wide range of information on trading complex products and options).
Regards,
Andy Lau