Market Volatility Sparks Heightened Scrutiny of Complex Products Sales

Posted on June 13th, 2022 at 1:07 PM
Market Volatility Sparks Heightened Scrutiny of Complex Products Sales

From the Desk of Jim Eccleston at Eccleston Law:

Market volatility can expose financial advisory firms that fail to supervise and ensure their advisors adhere to Regulation Best Interest (Reg BI) rules when they recommend complex products, according to FINRA.

Although structured products have grown in popularity, heightened market volatility applies pressure to some structured retail products, according to Jessica Hopper, head of enforcement at FINRA. Hopper did not pinpoint any specific complex products, but recent FINRA regulatory notices have implicated volatility-linked exchange-traded products, interest rate-based “steepener notes”, defined outcome exchange-traded funds, and mutual funds and ETFs using cryptocurrency-based strategies. While the complex products may appear to be another mutual fund, advisors must make themselves aware of the options-based strategies underlying many of the investments, according to Hopper. 

In one recent enforcement example, FINRA issued a $150,000 fine against Geneos Wealth Management in March. Between November 2016 and February 2018, Geneos “failed to reasonably supervise representatives’ recommendations of an alternative mutual fund” and establish “procedures reasonably designed to ensure that the firm and its representatives had a sufficient understanding” of the risks related to the fund they were recommending, which primarily relied on purchasing uncovered options, according to FINRA. One of the Geneos advisors responsible for selling the fund conceded, “I don’t know how this works”, according to Hopper. 

While FINRA has not announced any plans for rule changes, the regulator issued a notice in May reminding member firms of their supervisory responsibilities with complex products and seeking comments about future potential regulatory proposals as retail purchases have “increased significantly in recent years.”

Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, regulatory and disciplinary matters.

Tags: eccleston law, finra, regulation best interest

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Jim, Stephany and the whole team were a God send.  We felt like we were put into a situation where we had no advocate. Jim’s team came in with a strong, well laid out strategy on how to get our story heard. Where our outside compliance company had no ability to help, our Broker Dealer was impenitent, and the regulators were aggressive pursuing vague rules, Jim came like a barricade against an assault we did not understand. Though you pay member dues to be affiliated with FINRA and a B/D, you have no voice. The only thing that is truly heard in this un-level playing field is a bulldog’s bark like Jim’s. I would encourage anyone to call Jim and his team to find a real ally in the tough and complicated world of securities regulation. They are truly the best.

Greg P.


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