July 12, 2020

Volume X, Number 194

July 10, 2020

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FINRA Reminds Member Firms of Obligations in the Sale of Exchange Traded Products

FINRA recently issued Regulatory Notice 20-14 (“Reg. Notice 20-14”) in which they remind member firms of their obligations in connection with the purchase and sale of oil-linked exchange-traded products (“ETPs”).  Oil-linked ETPs, as well as other commodity-linked ETPs, do not necessarily track the price of the underlying commodity, but rather may track the futures index value of the commodity.  FINRA warns that these ETPs may not be fully understood by retail investors, as well as some registered representatives who sell them.   

As a result, these products may subject retail investors to financial exposure of which they are unaware, as the markets for oil have recently undergone extraordinary volatility and some futures indices have lost a significant percentage of their value.  FINRA has also previously reminded firms of these issues in Regulatory Notice 10-51 concerning commodity futures-linked securities and in Regulatory Notice 17-32 concerning volatility-linked exchange-traded products.     

FINRA again reminds member firms that:

  1. recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended;

  2. firms must have fair and accurate communications with the public; and

  3. firms must have reasonably designed supervisory procedures in place to ensure that these obligations are met.

In addition, firms that offer complex ETPs are required to train registered representatives who sell these products about the terms and risks of these products.  Further, recommendations of these ETPS will be governed by the SEC’s Regulation Best Interest (“Reg. BI”) beginning June 30, 2020.  Reg. BI will require firms to “have a reasonable basis to believe that the recommended security is suitable for at least some investors” and “have a reasonable basis that the recommended security is in the specific retail customer’s best interest at the time the recommendation is made”.

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About this Author

David L. Ward Member Securities Litigation White Collar Defense & Government Investigations Complex Commercial Litigation Arbitration, Mediation, ADR

David Ward focuses his practice on financial services regulatory matters, internal investigations and related litigation. He represents financial services clients throughout the United States, including broker-dealers, investment advisors, banks, pension consultants, insurance companies and publicly traded entities before the SEC, FINRA, CFTC, U.S. Department of Justice and state regulators. David regularly assists clients in internal investigations; the defense of regulatory investigations, sales practice issues, corporate governance matters and securities-related litigation in state and...