FINRA has proposed a raft of potential restrictions on so-called "complex" investment products, among them leveraged and inverse funds. Whereas some of the proposed restrictions are at least somewhat reasonable, like passing some sort of rudimentary test to ensure the investor is aware of what the product is, others are downright outrageous, such as not allowing the fund to be held overnight.
FINRA should NOT restrict access to leveraged and inverse funds and other "complex" products. Here are some but not all of the reasons the proposed restrictions are wrong and unwelcome:
1. Investment Freedom. No matter how risky certain investments are, investors- not regulators- should be able to choose whether to invest in them or not. It is up to regulators to make sure that the funds perform their stated objectives correctly, not to decide who gets to use them or not.
2. Unfair and Arbitrary Restriction. Whereas investment firms and hedge funds have at their fingertips a vast array of tools which enable taking incredible amounts of risk, retail investors merely seeking to conveniently use leverage- and only up to 3x- are being targeted by these proposed restrictions. This is obviously unfair and punishes the retail investor simply because of their size.
3. Understanding Risk. Speaking from experience with both ProShares and Direxion, there is a wealth of information both managers have provided to understand the risks of their products. Not only that, there is a highly active online community which explores the risks of these funds as well as how accurately they perform their stated objectives.
4. Volatility. Funds such as UPRO, TQQQ, TMF, TMV are leveraged from index funds, which themselves are drastically less volatile than individual stocks. Individual stocks are far more volatile even than leveraged ETFs, often moving +/- 10% daily, and yet any investor can put their entire net worth into any stock with no restriction and this is seen as normal.
5. Complexity. Market movements are inherently complex, no matter how simple the investment. An individual stock's price is dependent on a practically infinite number of factors, and can only be potentially understood far after the fact. Should that be a reason not to allow people to own individual stocks? Moreover, easy access to more elaborate risk-management strategies such as covered call writing or risk-parity is highly desirable, allowing retail investors to participate in what was previously much more time-consuming. In other words, complexity can be good.
Throughout my experience with leveraged products and their communities, I have never once heard "I wish that this was restricted so that I couldn't have invested in it".
Please, allow investors to make their own choices.
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Samuel Walker Comment On Regulatory Notice 22-08
To whom it may concern,
FINRA has proposed a raft of potential restrictions on so-called "complex" investment products, among them leveraged and inverse funds. Whereas some of the proposed restrictions are at least somewhat reasonable, like passing some sort of rudimentary test to ensure the investor is aware of what the product is, others are downright outrageous, such as not allowing the fund to be held overnight.
FINRA should NOT restrict access to leveraged and inverse funds and other "complex" products. Here are some but not all of the reasons the proposed restrictions are wrong and unwelcome:
1. Investment Freedom. No matter how risky certain investments are, investors- not regulators- should be able to choose whether to invest in them or not. It is up to regulators to make sure that the funds perform their stated objectives correctly, not to decide who gets to use them or not.
2. Unfair and Arbitrary Restriction. Whereas investment firms and hedge funds have at their fingertips a vast array of tools which enable taking incredible amounts of risk, retail investors merely seeking to conveniently use leverage- and only up to 3x- are being targeted by these proposed restrictions. This is obviously unfair and punishes the retail investor simply because of their size.
3. Understanding Risk. Speaking from experience with both ProShares and Direxion, there is a wealth of information both managers have provided to understand the risks of their products. Not only that, there is a highly active online community which explores the risks of these funds as well as how accurately they perform their stated objectives.
4. Volatility. Funds such as UPRO, TQQQ, TMF, TMV are leveraged from index funds, which themselves are drastically less volatile than individual stocks. Individual stocks are far more volatile even than leveraged ETFs, often moving +/- 10% daily, and yet any investor can put their entire net worth into any stock with no restriction and this is seen as normal.
5. Complexity. Market movements are inherently complex, no matter how simple the investment. An individual stock's price is dependent on a practically infinite number of factors, and can only be potentially understood far after the fact. Should that be a reason not to allow people to own individual stocks? Moreover, easy access to more elaborate risk-management strategies such as covered call writing or risk-parity is highly desirable, allowing retail investors to participate in what was previously much more time-consuming. In other words, complexity can be good.
Throughout my experience with leveraged products and their communities, I have never once heard "I wish that this was restricted so that I couldn't have invested in it".
Please, allow investors to make their own choices.
Thank you,
Samuel Walker