SEC’s Gary Gensler sees ‘opportunity’ for complex product rules

A screenshot from FINRA’s annual conference in May 2022 shows CEO Robert Cook in conversation with SEC Chairman Gary Gensler during a session at the event.


Add SEC Chairman Gary Gensler to the growing chorus of regulators and critics calling for tougher rules on complex products, despite cries of protest from the industry.

Gensler’s agency has “an opportunity to update our capital markets” and “can’t take anything for granted” in light of the impact of new technologies enabling faster trade execution as well as the collection and selling data to financial firms, he said in a session with FINRA CEO Robert Cook at the FINRA conference on May 16. While he didn’t reveal any new rule proposals, Gensler expressed continued concern about alternatives. some products such as leveraged or inverse ETFs and other exchange-traded complexes investmentsas well as practices surrounding options trading.

His remarks followed a flurry of letters to FINRA from member firms, registered representatives and other wealth management stakeholders. oppose potential new regulations define and codify the procedures governing the sale of complex products and options. They also come after state regulators – who have previously warned that the SEC’s Best Interest regulation has not changed industry practices in terms of sale of complex, expensive and risky products — and attorneys for aggrieved clients have each sent letters to FINRA endorsing the idea of ​​new rules.

Gensler said any proposal could affect both retail and institutional clients. He asked Commission staff to examine the “appropriateness of sales practices”, the functioning of capital markets in light of asset valuations and what fiduciary duty and Reg BI mean for ETFs in leverage or reverse, options and the use of derivatives in vehicles structured as funds. , exchange-traded notes and exchange-traded products, he told Cook.

“Investors can choose the risks they take,” Gensler said. “They’re supposed to get full and fair disclosure and not be lied to. But there’s also a concept of making sure that when a broker, an investment adviser makes recommendations or gives advice or guides or pushes through digital engagement practices in all of this, that’s appropriate at risk for investors.

As examples of reasons for concern, he cited last year Case Archegos Capital Management and the so-called delta hedging which “accelerated certain problems within the market and the functioning of the market” during the “Volmageddonfrom February 2018.

Despite panels that volatility-linked products similar to those removed four years earlier are now returning to the market, with industry commentators responding to FINRA comments request for the public debate on complex products warn against the possible overbreadth of any new rules.

“We are concerned that various points that FINRA is inquiring about, such as an enhanced account approval process before an account can trade complex products, requiring a client to undergo training or an apprenticeship course before to be authorized to trade certain complex products, requiring client certifications regarding knowledge and experience or restricting or limiting retail clients’ access to complex products based on their net worth or other categories would unduly limit investors’ access to securities offered to the public and would be contrary to the disclosure-based system that underpins our securities laws,” wrote Van Eck Securities, a subsidiary of a group of fund companies managing $82 billion across a range of products, in an April 21 comment at FINRA.

On the other hand, state regulators represented by the North American Securities Administrators Association and attorneys for clients who are part of the Public Investors Advocate Bar Association supports new rules that would, if necessary, go further than FINRA’s proposals. The regulator should focus on training all representatives selling the products or offering options, and in particular their supervisors and compliance officers, said PIABA Chairman Michael Edmiston.

“I hope they continue to take very tough action against companies that fail to adequately address and manage the risks to a customer’s account presented by these products,” he said. . “They don’t understand the magnitude of the losses they can suffer if the market goes against them.”

Former SEC Chairman Jay Clayton, who served in the Trump administration, also had raised questions about complex products, Gensler pointed out in his remarks at the FINRA conference. These petitions were accompanied by actions by the SEC that would have increased access to certain alternative products too, however.

Cook sought clarification from Gensler as to whether the areas he discussed represented matters he had asked SEC staff “to consider for further potential action.” Gensler answered in the affirmative, noting that he sees new investment technologies as “just as transformative as the internet” was when it was introduced. He then asked Cook if he wore a Fitbit, drove a car and charged his phone regularly. Cook said he had an Apple Watch and also answered “yes” to the other two questions.

“So this Apple Watch, this driving your car and, yes, even if you charge your phone every night, it provides data about you, my friend, to a data aggregator who can then sell it to a financial company and kind of assess whether you’re a better risk or a worse risk in terms of how you drive your car, how you walk and exercise and, yes, even if you charge your phone,” Gensler said. “And then that raises questions about, well, how do you market, how is marketing a platform? Are they doing it in your best interests, your best execution of a transaction, or is it their income?And therein lies the challenges of our times.