It has come to my attention that FINRA issued a notice on 8 March 2022 regarding certain securities with simple inverse or leveraged price movements.
Designation of these products as complex securities is completely unwarranted as any complexities in the structuring of these securities is no more relevant to investor, that the structuring of any other ETF. The price action is not complex to understand. For example a 3x S&P 500 ETF will multiply the volatility and price movement of the S&P by 3. Complexities related to the underlying collateral and derivative products used to construct such returns aren't all that important other that the normally high expense ratios (a ratio that is clearly stated and easily found with google or the prospectus, just as with any other ETF). The only thing that might not be obvious a simpleton is so called "decay", but that isn't the fault of the security, it is because people don't understand multiplication. A leveraged ETF that requires 5th grade math and reading abilities doesn't make that security a "complex security". Designating these securities as complex securities is unneeded and a useless over reach of regulation.
These are an important part of my personal investment strategy, where I can achieve my a higher portfolio beta, without having to allocate a large percentage of my portfolio to extra risky individual stocks to try and beat the market.
The most onerous aspect of deeming these complex securities is the potential for a net worth requirement. Low net worth and an investors ability understand a so called "complex security" are not strongly corelated. Such regulation could even be considered discriminatory because they would disproportionately effect investors from minority groups.
Lastly, I don't even know why FINRA would be worrying about leverage or inverse ETF's when a real issue causing people to blow up their trading accounts with crazy 'YOLO' option trading strategies which they may not fully understand. On principal, people should be free to be idiots, however, I think it would be helpful if FINRA made an optional options course for brokers, that they could provide to their clients as a educational benefit when opening an options account.
Dan Morgan Comment On Regulatory Notice 22-08
It has come to my attention that FINRA issued a notice on 8 March 2022 regarding certain securities with simple inverse or leveraged price movements.
Designation of these products as complex securities is completely unwarranted as any complexities in the structuring of these securities is no more relevant to investor, that the structuring of any other ETF. The price action is not complex to understand. For example a 3x S&P 500 ETF will multiply the volatility and price movement of the S&P by 3. Complexities related to the underlying collateral and derivative products used to construct such returns aren't all that important other that the normally high expense ratios (a ratio that is clearly stated and easily found with google or the prospectus, just as with any other ETF). The only thing that might not be obvious a simpleton is so called "decay", but that isn't the fault of the security, it is because people don't understand multiplication. A leveraged ETF that requires 5th grade math and reading abilities doesn't make that security a "complex security". Designating these securities as complex securities is unneeded and a useless over reach of regulation.
These are an important part of my personal investment strategy, where I can achieve my a higher portfolio beta, without having to allocate a large percentage of my portfolio to extra risky individual stocks to try and beat the market.
The most onerous aspect of deeming these complex securities is the potential for a net worth requirement. Low net worth and an investors ability understand a so called "complex security" are not strongly corelated. Such regulation could even be considered discriminatory because they would disproportionately effect investors from minority groups.
Lastly, I don't even know why FINRA would be worrying about leverage or inverse ETF's when a real issue causing people to blow up their trading accounts with crazy 'YOLO' option trading strategies which they may not fully understand. On principal, people should be free to be idiots, however, I think it would be helpful if FINRA made an optional options course for brokers, that they could provide to their clients as a educational benefit when opening an options account.