Retail investors’ involvement in crypto and traditional finance within the past few years has grown to new heights, which is now giving regulators a cause for concern.
FINRA urges members to educate retail investors
According to the Financial Industry Regulatory Authority (FINRA), the majority of retail investors don’t understand the many complex investment products that are on the market and their associated risks.
This has forced the brokerage firm regulator to issue a notice to all of its members about acting in the best interests of their clients.
The regulator has compelled its members to comply with the Regulation Best Interest (Reg BI) act which requires brokers to act in the clients’ best interest.
In essence, brokerage firms might have to start explaining the nature of some of their products to their customers alongside their potential rewards and risks.
Beyond that, the regulator is also considering broader rules for these investment products. It is currently seeking stakeholders’ opinions on whether the current regulatory framework is sufficient to protect investors — a move that many predicts is preceding a new set of rules that would be guiding “complex products.”
Crypto investment products are being targeted
One area that could be affected is crypto with its complex offerings. In the warning note, FINRA describes a complex product as
“A product with features that may make it difficult for a retail investor to understand the essential characteristics of the product and its risks (including the payout structure and how the product may perform in different market and economic conditions).”
This definition covers several investment vehicles, including defined outcome ETFs, volatility-linked ETPs, structured products. In addition, mutual funds and ETFs that offer strategies employing cryptocurrency futures are also on the list. Thus, those offering crypto ETFs may have to operate under stricter rules.
According to FINRA,
“The features of these products are such that they may be difficult for a retail investor to understand the essential characteristics of the products and their risks and, therefore, are complex.”
It added that the risk becomes much higher when a retail investor accesses these products without the assistance of a professional.
Notably, FINRA isn’t the only government agency concerned with the various financial products on the market, the Securities and Exchange Commission (SEC) has, at different times, been critical of these products and urging investors to carry out their research before investing.
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Author: Oluwapelumi Adejumo