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FINRA Mulls Update to Complex-Product Rules

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What You Need to Know

  • FINRA is looking closely at the offering of complex products by broker-dealers.
  • FINRA is looking at the qualifications for options trading as self-directed investing has grown.
  • The regulator is also focused on updating its rulebook to reflect what it learned during COVID.

The Financial Industry Regulatory Authority is mulling an update to its rules around complex products, according to Robert Cook, FINRA’s president and CEO.

The broker-dealer self-regulator is “looking closely at the offering of complex products by our member firms,” Cook said during a recent event held by the New York Law School.

“We’re close to issuing a Regulatory Notice to solicit views about whether these rules need to be updated.”

Complex products include junk bonds, structured notes and leveraged and inverse ETFs, according to FINRA. Complex products may use futures and options or other potentially complicated trading strategies.

FINRA wants to assess whether the rules it has in place “provide the appropriate safeguards for investors.”

For instance, FINRA has “longstanding rules on how do you qualify someone to trade options. Those rules were written long before a normal retail investor could trade an option without going through a professional,” Cook said. “But today, of course, you can go online, pick up your phone, or trade on a self-directed basis.”

The Securities and Exchange Commission, Cook continued, recently launched an initiative in the complex products space, so FINRA will have to ensure any changes it makes to its rule set “syncs” with what the SEC is doing.

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COVID Lessons

FINRA is also “focused on updating our rulebook to reflect what we’ve learned during COVID,” Cook said.

A lot of FINRA rules are “built around a bricks-and-mortars vision of how work was accomplished. Customers’ and employees’ preferences have changed.”

The challenge, he said: “How do we make sure that our rules are evolving to ensure they provide continued protection to investors.”

Over the next 12 to 18 months, FINRA will also be looking to see if recent sweeps that it launched will result in rulemaking, Cook said.

FINRA announced on Sept. 17 an exam sweep on broker-dealer practices related to the acquisition of customers through social media channels.

In mid-October, FINRA began examining firms’ offering of, and services provided to, special-purpose acquisition companies, or SPACs.