Defiance ETFS, LLC Comment On Regulatory Notice 22-08
sylvia jablonski
CEO, CIO
Ms. Marcia E. Asquith, Executive Vice President Financial Industry Regulatory Authority, Inc. 1735 K Street, NW Washington, DC 20006-1500 Re: FINRA Regulatory Notice 22-08 (the “Notice”) Dear Ms. Asquith: Defiance ETFS, LLC (“Defiance”), appreciates the opportunity to comment on the Notice. We commend the Financial Industry Regulatory Authority (“FINRA”) for reminding members of their current regulatory obligations. However, we are concerned that FINRA is considering a series of measures that could prevent or restrict self-directed investors from buying a broad range of public securities designated as “complex products.” We believe these measures have the potential to harm investors by restricting their access to dozens of popular mutual funds, ETFs and other investments that provide important benefits, including portfolio protection and diversification. For these and other reasons we object to the restrictions on investors that FINRA is considering. FINRAs measure would upend the federal securities laws Investors have been well-served by our disclosure-based regulatory system for almost 90 years.We are concerned that the questions FINRA poses in the Notice reflect a fundamental shift away from the current disclosure-based regime toward merit-based regulation. Specifically, the questions FINRA asks about imposing restrictions, limits or gates on investors’ right to buy public securities suggest an approach that is contrary to the disclosure-based system that Congress established more than 80 years ago. FINRA’s role in our regulatory system is well established. FINRA is the self-regulatory organization for brokers and dealers. Its authority to regulate in this capacity is strictly limited to those areas delegated to it under the Securities Exchange Act of 1934 (the “Act”). The measures FINRA is considering appear to exceed this authority and contravene the organization’s regulatory mandate under the Act. For almost 90 years U.S. securities laws have protected individual investors through a system based on full and fair disclosure. FINRA should not seek to upend the current disclosure-based system by imposing restrictions on self-directed investors’ right to buy public securities. FINRA’s Measures Have the Potential to Harm Investors FINRA’s measures could apply to dozens of popular mutual funds, ETFs, and other investments that provide important benefits to investors, including portfolio diversification and protection from downside risk. The Notice contemplates requiring individual investors to pass tests of investment knowledge, satisfy minimum net worth requirements or be pre-approved by their broker based on vague standards. We are concerned that measures which introduce subjectivity, testing bias, and net worth requirements have the potential to arbitrarily disadvantage certain investors, including those from underserved communities that have historically been denied access to the financial services sector. FINRA’s measures may lead brokerage firms to stop offering “complex” securities due to the vagueness, cost, and difficulty of implementation. Issuers may be less inclined to develop new and innovative products – depriving U.S. investors of opportunities and harming investors and the U.S. securities markets. FINRA’s Measures are Unnecessary Defiance has not seen evidence that investors do not understand the instruments in which they invest. Instead, the Notice cites as evidence enforcement cases brought against brokers for inappropriate recommendations. Once again, we appreciate the opportunity to comment on the Notice. If you have any questions regarding our comment letter or would like additional information, please feel free to contact Sylvia Jablonski, CEO, CIO Defiance ETFS, LLC. 1 Defiance ETFs is an exchange traded funds sponsor and registered investment advisor focused on thematic investing 2 [Defiance] has concerns about other aspects of the Notice as well, but is choosing to focus on the measures described herein because of their significance. 3 For example, the rules of an SRO authorized under Section 15A of the Act are required to be designed to “remove impediments to and perfect the mechanism of a free and open market and a national market system.” They must not be “designed to permit unfair discrimination between customers, issuers, broker, or dealers…” Section 15A(b)(6). The measures under consideration would violate both of these mandates – by preventing or restricting individual investors’ right to purchase public securities and by introducing arbitrary and potentially biased measures, such as testing, net worth and other requirements, that could unfairly disadvantage certain investors. FINRA, Regulatory Notice 22-08, at 5.
Defiance ETFS, LLC Comment On Regulatory Notice 22-08
Ms. Marcia E. Asquith, Executive Vice President Financial Industry Regulatory Authority, Inc. 1735 K Street, NW Washington, DC 20006-1500 Re: FINRA Regulatory Notice 22-08 (the “Notice”) Dear Ms. Asquith: Defiance ETFS, LLC (“Defiance”), appreciates the opportunity to comment on the Notice. We commend the Financial Industry Regulatory Authority (“FINRA”) for reminding members of their current regulatory obligations. However, we are concerned that FINRA is considering a series of measures that could prevent or restrict self-directed investors from buying a broad range of public securities designated as “complex products.” We believe these measures have the potential to harm investors by restricting their access to dozens of popular mutual funds, ETFs and other investments that provide important benefits, including portfolio protection and diversification. For these and other reasons we object to the restrictions on investors that FINRA is considering. FINRAs measure would upend the federal securities laws Investors have been well-served by our disclosure-based regulatory system for almost 90 years.We are concerned that the questions FINRA poses in the Notice reflect a fundamental shift away from the current disclosure-based regime toward merit-based regulation. Specifically, the questions FINRA asks about imposing restrictions, limits or gates on investors’ right to buy public securities suggest an approach that is contrary to the disclosure-based system that Congress established more than 80 years ago. FINRA’s role in our regulatory system is well established. FINRA is the self-regulatory organization for brokers and dealers. Its authority to regulate in this capacity is strictly limited to those areas delegated to it under the Securities Exchange Act of 1934 (the “Act”). The measures FINRA is considering appear to exceed this authority and contravene the organization’s regulatory mandate under the Act. For almost 90 years U.S. securities laws have protected individual investors through a system based on full and fair disclosure. FINRA should not seek to upend the current disclosure-based system by imposing restrictions on self-directed investors’ right to buy public securities. FINRA’s Measures Have the Potential to Harm Investors FINRA’s measures could apply to dozens of popular mutual funds, ETFs, and other investments that provide important benefits to investors, including portfolio diversification and protection from downside risk. The Notice contemplates requiring individual investors to pass tests of investment knowledge, satisfy minimum net worth requirements or be pre-approved by their broker based on vague standards. We are concerned that measures which introduce subjectivity, testing bias, and net worth requirements have the potential to arbitrarily disadvantage certain investors, including those from underserved communities that have historically been denied access to the financial services sector. FINRA’s measures may lead brokerage firms to stop offering “complex” securities due to the vagueness, cost, and difficulty of implementation. Issuers may be less inclined to develop new and innovative products – depriving U.S. investors of opportunities and harming investors and the U.S. securities markets. FINRA’s Measures are Unnecessary Defiance has not seen evidence that investors do not understand the instruments in which they invest. Instead, the Notice cites as evidence enforcement cases brought against brokers for inappropriate recommendations. Once again, we appreciate the opportunity to comment on the Notice. If you have any questions regarding our comment letter or would like additional information, please feel free to contact Sylvia Jablonski, CEO, CIO Defiance ETFS, LLC. 1 Defiance ETFs is an exchange traded funds sponsor and registered investment advisor focused on thematic investing 2 [Defiance] has concerns about other aspects of the Notice as well, but is choosing to focus on the measures described herein because of their significance. 3 For example, the rules of an SRO authorized under Section 15A of the Act are required to be designed to “remove impediments to and perfect the mechanism of a free and open market and a national market system.” They must not be “designed to permit unfair discrimination between customers, issuers, broker, or dealers…” Section 15A(b)(6). The measures under consideration would violate both of these mandates – by preventing or restricting individual investors’ right to purchase public securities and by introducing arbitrary and potentially biased measures, such as testing, net worth and other requirements, that could unfairly disadvantage certain investors. FINRA, Regulatory Notice 22-08, at 5.