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October 28, 2020 at 02:50 PM
Securities and Exchange Commission Chairman Jay Clayton issued a warning Wednesday about expanded access to self-directed accounts and complex investment products and how they’re marketed to retail investors, and signaled tighter controls may be in the offing.
In a joint statement with the heads of the SEC’s Divisions of Investment Management, Trading and Markets, and Corporation Finance, Clayton stated that retail investors “have a wide array of investment options available to them, including an increasing number and type of investment products that are more complex than conventional stock and bond investments.”
These complex products may be exchange-traded or sold directly to investors — including “leveraged/inverse” products, which seek to provide leveraged or inverse exposure to an underlying index by a specified multiple generally on a daily basis, as well as products that provide investment exposure to less conventional assets, including commodity prices, Clayton and the SEC officials said.
“We believe that these leveraged/inverse products and other complex products may present investor protection issues — particularly for retail investors who may not fully appreciate the particular characteristics or risks of such investments, including the risks that holding such products may pose to their investment goals,” the statement said.
The officials noted that Regulation Best Interest’s standard of conduct for brokers and an investment advisor’s fiduciary duty “apply to transactions in complex products where the transaction is recommended to a retail customer.”
Related: SEC Chief: Firms ‘Meeting Their Obligations’ on Reg BI
A broker-dealer or an advisor “recommending or advising on such products must have a reasonable basis to believe that the recommendation or advice provided is in the best interest of the retail investor,” the officials said. “A broker-dealer, moreover, cannot establish a reasonable basis to recommend complex products to retail customers without understanding the terms, features and risks of these products.”
