CFA, along with Americans for Financial Reform Education Fund and Better Markets, sent a letter to the Financial Industry Regulatory Authority (FINRA), urging the self-regulatory organization to update its rules for the self-directed investment in complex products and options. The current regulatory framework for complex products and options, which was adopted at a time when the majority of individuals accessed financial products through financial professionals, rather than through self-directed platforms, is not appropriately tailored to address current concerns raised by these products, the letter states.

According to the letter, markets have experienced significant changes in recent years, both with regard to the increased diversity of investment products in the marketplace and the new ways in which investment products are sold to retail investors. As a result, retail investors now have unfettered access to a variety of complex products and strategies that were largely unavailable to the retail market just a few years ago. While providing access to new and innovative products certainly can be beneficial to investors who fully understand those products’ essential characteristics and risks, doing so also increases the likelihood that investors who don’t fully understand those products’ essential characteristics and risks will misuse them. This issue has taken on increased importance as the number of accounts trading in complex products and options has increased significantly in recent years.

Recognizing the substantial risks to retail investors of investing in complex products and options through self-directed platforms and the current lack of regulatory safeguards to ensure that only those who understand these products’ essential characteristics and risks use them, CFA urged FINRA to update the framework for complex products and options to better protect retail investors by:

• updating existing options account approval rules to ensure that broker-dealers approve customers for options trading only if options trading is appropriate for their customers;
• applying the options account approval rules more broadly to other complex products that are purchased through self-directed platforms; and
• vigorously enforcing these options and complex products account approval rules to ensure firms comply with their regulatory obligations.

The goal of this project should be to ensure that investors who understand a complex product’s essential characteristics and risks continue to have access to such a product, while investors who do not understand a complex product’s essential characteristics and risks do not continue to have unfettered access to such a product, given the increased potential for these investors to suffer great financial and personal harm from the use of such a product. As key gatekeepers in the market, it is entirely appropriate for broker-dealers to have heightened obligations to ensure that their customers who do not understand complex products and options do not use them.