I have been investing for over 20 years, mainly in common stocks but sometimes in so-called “complex products” like futures, options, leveraged and inverse ETPs, etc. I use them when I believe they are suitable tools for the market situation at that moment. I don’t mean that I always make right investment decisions but, as a retail investor, I find that it is very important for me to have the right investment tools available in the market. In US, many investment tools are reserved for professional and institution investors. IPO and short selling are almost out of reach to retail investors. Concerning short selling, leveraged and inverse ETPs are good alternatives if an investor wants similar investment strategy but doesn’t want to trading on margin using tools like futures and options.
If the “complex products” are approved by relevant authorities for the retail market, it is not reasonable to limit their access, restricting the investment choice and opportunity for the retail investors, simply in the name of investor protection. Unlike professional and institution investors who trade with other people’s money, retail investors invest with their own money. Hence, retail investors are usually more risk-conscious. Would they really trade something that they don’t understand? Certainly not! Therefore, FINRA’s idea of equating the lack of investors’ understanding of “complex product” to risk is faulty.
As shown in the FINRA Regulatory Notice 22-08, all the problematic cases of FINRA sanction involved unsuitable recommendations of “complex products” by brokers to retail investors. Is it simply that the financial professionals did not fully grasp (or understand) the “complex product’s features”? I am afraid that FINRA again puts too much emphasis on their understanding. Instead it has to study thoroughly the integrity of these professionals. Is there any evidence that they would like to target and exert undue influence on retired wealth seniors? Does the commission, if any, that these professionals received from selling “complex products” push them to make more recommendations on these products?
FINRA has the responsibility to clarify these questions about regulating the practices of sale of “complex products”, rather than relating the risk of investing “complex products” to the understanding of these product by retail investors or brokers. Therefore, it is irrelevant to require retail investors to complete training or a learning course before trading these products. FINRA should not limit the access of these product to retail investors, especially those who do not rely on the recommendations of financial professionals.
Nevertheless, it is always good for investors to have better understanding on what they invest. However, they don’t really learn just by reading prospectus or disclosure materials provided by investment companies. Investors learn by trading in the market. After all, the market is the perfect learning place. In my experience, when I find an investment product which is complex and new to me. I would find as much information about it as I could and get a preliminary understanding. If it is a good choice for the market situation, I would invest a small amount of money on it to learn about its actual behavior in the market before increasing my exposure. Reasonable judgment and limited exposure is my key to risk management, rather than pure understanding of theoretical characteristics of an investment product. I believe it applies to other investors too provided that there are sufficient number of investment products of the same category for them to compare and choose, no matter how complex the products are. Recently, more leverage and inverse volatility-link ETPs are approved. It is a good sign for retail investors but the proposal to limit the access to “complex products” is contradicting to the effort of allowing more choice for investors.
As a matter of fact, retail investors in some areas outside US are allowed to trade “complex products” simply by declaring themselves as long term or experienced investors. Investors make their declaration based on their self-assessment and their appetites of risk. Be they high-net worth or not, they would be exposed to the same risk (percentage-wise) if they invest in the same product. So it is pointless to have limitation on “complex products” in terms of one’s net-worth. In fact, it is discrimination.
In short, we don’t need nanny state and similarly we don’t need nanny investor protection policy.
For the Public
FINRA DATA
FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist.
For Industry Professionals
FINPRO
Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks.
For Member Firms
FINRA GATEWAY
Firm compliance professionals can access filings and requests, run reports and submit support tickets.
For Case Participants
DR PORTAL
Arbitration and mediation case participants and FINRA neutrals can view case information and submit documents through this Dispute Resolution Portal.
Need Help? | Check System Status
Log In to other FINRA systems
B.N. Chan Comment On Regulatory Notice 22-08
I have been investing for over 20 years, mainly in common stocks but sometimes in so-called “complex products” like futures, options, leveraged and inverse ETPs, etc. I use them when I believe they are suitable tools for the market situation at that moment. I don’t mean that I always make right investment decisions but, as a retail investor, I find that it is very important for me to have the right investment tools available in the market. In US, many investment tools are reserved for professional and institution investors. IPO and short selling are almost out of reach to retail investors. Concerning short selling, leveraged and inverse ETPs are good alternatives if an investor wants similar investment strategy but doesn’t want to trading on margin using tools like futures and options.
If the “complex products” are approved by relevant authorities for the retail market, it is not reasonable to limit their access, restricting the investment choice and opportunity for the retail investors, simply in the name of investor protection. Unlike professional and institution investors who trade with other people’s money, retail investors invest with their own money. Hence, retail investors are usually more risk-conscious. Would they really trade something that they don’t understand? Certainly not! Therefore, FINRA’s idea of equating the lack of investors’ understanding of “complex product” to risk is faulty.
As shown in the FINRA Regulatory Notice 22-08, all the problematic cases of FINRA sanction involved unsuitable recommendations of “complex products” by brokers to retail investors. Is it simply that the financial professionals did not fully grasp (or understand) the “complex product’s features”? I am afraid that FINRA again puts too much emphasis on their understanding. Instead it has to study thoroughly the integrity of these professionals. Is there any evidence that they would like to target and exert undue influence on retired wealth seniors? Does the commission, if any, that these professionals received from selling “complex products” push them to make more recommendations on these products?
FINRA has the responsibility to clarify these questions about regulating the practices of sale of “complex products”, rather than relating the risk of investing “complex products” to the understanding of these product by retail investors or brokers. Therefore, it is irrelevant to require retail investors to complete training or a learning course before trading these products. FINRA should not limit the access of these product to retail investors, especially those who do not rely on the recommendations of financial professionals.
Nevertheless, it is always good for investors to have better understanding on what they invest. However, they don’t really learn just by reading prospectus or disclosure materials provided by investment companies. Investors learn by trading in the market. After all, the market is the perfect learning place. In my experience, when I find an investment product which is complex and new to me. I would find as much information about it as I could and get a preliminary understanding. If it is a good choice for the market situation, I would invest a small amount of money on it to learn about its actual behavior in the market before increasing my exposure. Reasonable judgment and limited exposure is my key to risk management, rather than pure understanding of theoretical characteristics of an investment product. I believe it applies to other investors too provided that there are sufficient number of investment products of the same category for them to compare and choose, no matter how complex the products are. Recently, more leverage and inverse volatility-link ETPs are approved. It is a good sign for retail investors but the proposal to limit the access to “complex products” is contradicting to the effort of allowing more choice for investors.
As a matter of fact, retail investors in some areas outside US are allowed to trade “complex products” simply by declaring themselves as long term or experienced investors. Investors make their declaration based on their self-assessment and their appetites of risk. Be they high-net worth or not, they would be exposed to the same risk (percentage-wise) if they invest in the same product. So it is pointless to have limitation on “complex products” in terms of one’s net-worth. In fact, it is discrimination.
In short, we don’t need nanny state and similarly we don’t need nanny investor protection policy.