What You Need to Know
- FINRA's potential definition of complex products is broad enough to include even target date funds, Dave Nadig says.
- Ric Edelman says requiring investors to pass an exam, as FINRA has proposed, would be unworkable.
- Comments are due May 9.
The Financial Industry Regulatory Authority’s potential changes to regulation of complex products are “fatally flawed” and “completely unworkable,” according to RIA founder turned crypto evangelist Ric Edelman.
As set out in Regulatory Notice 22-08, FINRA could limit retail investor access to many mutual funds, ETFs and closed-end funds, according to Dave Nadig, financial futurist at ETF Trends.
“I’m a bit terrified by the scope the notice includes as a potential definition for what constitutes a ‘complex’ product,” Nadig told FINRA in his comment letter.
Comments continue to flood in to FINRA as the May 9 comment deadline nears.
As FINRA has stated, there is currently no standard definition of a “complex product.” But it names leveraged and inverse ETFs, Bitcoin futures funds and equity-indexed annuities as examples.
According to Debra Fuhr, managing partner, founder and owner of ETFGI, FINRA has said that complex products could include:
- Nontraditional index funds, including smart beta, quant, custom index and ESG funds
- Emerging market funds
- High-yield bond funds
- Target date funds
- Floating-rate loan funds
- Unconstrained bond funds
- Insurance-linked securities
In its request for comment, FINRA asked whether investors should be required to pass tests and get pre-approved to buy various types of mutual funds, ETFs and other investments.
FINRA also asked for feedback from broker-dealers on how they’re handling complex products as the regulator weighs the changes to its rules.
Robert Cook, FINRA’s CEO, said last October that FINRA is “looking closely at the offering of complex products by our member firms.”
FINRA said in its notice that the availability of complex products and options “can potentially expand the investment opportunities for retail investors and, if properly understood, offer favorable investment outcomes (e.g., enhancing returns, limiting losses or improving diversification).”