Page 12 - Investment Advisor June 2022

Beginnings

WASHINGTON WATCH

By Melanie Waddell

FINRA Complex Product Ideas Are

‘Unworkable,’ Terrifying, Edelman, Nadig Say

Potential definition is so broad it could include target date funds,
Dave Nadig says.

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. It 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 avail-
ability of complex products and options
he Financial Industry Regu- As FINRA has stated, there is current- “can potentially expand the investment
latory Authority’s potential ly no standard definition of a “complex opportunities for retail investors and,
T changes to regulation of com- product.” But it names leveraged and if properly understood, offer favorable
plex products are “fatally flawed” and inverse ETFs, Bitcoin futures funds and investment outcomes (e.g., enhancing
“completely unworkable,” according to equity-indexed annuities as examples. returns, limiting losses or improving
RIA founder turned crypto evangelist According to Debra Fuhr, managing diversification).” However, “important
Ric Edelman, in a comment letter. partner, founder and owner of ETFGI, regulatory concerns arise when inves-
As set out in Regulatory Notice 22-08, FINRA has said that complex products tors trade complex products without
FINRA could limit retail investor access could include: understanding their unique characteris-
to many mutual funds, ETFs and closed- • Nontraditional index funds, includ- tics and risks,” it said. FINRA: Adobe Stock; Dave Nadig: Eva Marie Uzcategui/Bloomberg
end funds, added Dave Nadig, financial ing smart beta, quant, custom index Nadig told FINRA in his comment
futurist at ETF Trends. “I’m a bit terri- and ESG funds letter that “If you chase all of the foot-
fied by the scope the notice includes as a • Emerging market funds notes and referenced documentation
potential definition for what constitutes • High-yield bond funds (hand up!), it’s not hyperbole to suggest
a ‘complex’ product,” Nadig told FINRA • Target date funds that every fund providing anything but
in his comment letter. • Floating-rate loan funds plain vanilla beta exposure to stocks and
Hundreds of comment letters had • Unconstrained bond funds bonds would be included” in FINRA’s
been received by the May 9 deadline. • Insurance-linked securities list of complex products.

10 INVESTMENT ADVISOR JUNE 2022 | ThinkAdvisor.com