June 25, 2019

June 24, 2019

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FINRA Publishes Regulatory Notice Regarding Sales Practice Obligations for Volatility-Linked Exchange-Traded Products

On October 16, the Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 17-32 (Notice), which reminds FINRA member firms of their sale practice obligations related to the sale of volatility-linked exchange-traded products (ETPs), which are designed to track Chicago Board Options Exchange Volatility Index (VIX) futures. Based on the high likelihood that such instruments may lose value over time, FINRA notes that volatility-linked ETPs may not be suitable for certain retail investors, in particular those who use them as part of a buy-and-hold strategy; and that because of the complex nature of these instruments, it is possible that investors and registered representatives may not understand the risks oNotice reminds member firms of the need to (among other things) (1) perform reasonable diligence to determine whether there is a reasonable basis to believe that each such ETP is suitable for at least some investors prior to recommending the ETPf the product. Based on the risk profile of these investments, the ; (2) form a reasonable belief that a recommended volatility-linked ETP is suitable for particular investors to whom it is recommended; (3) provide investors with fair and accurate communications with respect to these products; and (4) consider implementation of heightened scrutiny and supervision to ensure that registered representatives and supervisors understand the risks of the instruments and comply with applicable suitability and communications obligations.

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About this Author

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...

Stanley V. Polit, Katten Muchin, Financial Services lawyer, Corporate Regulatory Matters Attorney

Stanley Polit concentrates his practice in transactional, corporate and regulatory aspects of financial services matters. Stan is able to provide legal services to a wide variety of clients including proprietary trading firms, hedge funds, broker-dealers, registered investment advisers, commodity trading advisers, financial institutions and general corporate clients.

Prior to joining Katten, Stan served as a council member for a national crisis management firm, where he specialized in crisis communication and merged media strategies. He has lectured extensively and conducted trainings related to these topics at numerous national and international conferences, including the National Communication Association's National Convention, the International Crisis and Risk Communication Conference and the Disaster Recovery Journal's World Business Continuity Conference.