Comment Period Closes For FINRA ‘Complex’ Rule

Comment Period Closes For FINRA ‘Complex’ Rule

The proposal could dramatically alter retail investor access to nonvanilla ETFs.

Reviewed by: Dan Mika
Edited by: Dan Mika

The Financial Industry Regulatory Authority is due to cease taking comments from the asset management industry and the public Monday on a proposal that could curb consumers from accessing a swath of exchange-traded products with exposure to securities that aren’t solely stocks or bonds. 

Approximately 750 comments were posted on the proposal’s public comment directory of 11 a.m. Eastern Time, with the vast majority being in opposition. It is unclear how many comments may not be public because they were submitted through the mail. 

The proposal doesn’t define a “complex product,” but uses defined-outcome ETFs, crypto futures funds, and leveraged and inverse products as examples. Those suggest a broader definition than what the Securities and Exchange Commission considers to be “complex.” SEC Chairman Gary Gensler used “complex” to describe geared ETFs last October when announcing a staff review of the exchange-traded product class. 

FINRA is asking its members to consider industrywide rules ranging from requiring retail investors to take courses to prove their acumen to restricting customer access to such products to high net worth or accredited investors.  

Industry Response 

The proposal could restrict ETF issuers from freely offering a swath of funds to the growing retail investor class. 

VanEck Securities Corp. said in its comments that the rules could overturn the long-standing legal basis of regulators requiring disclosure for investors to make their own informed decisions, rather than not allowing investors access to certain products. 

“The Notice foreshadows a world that upends this bargain, where a FINRA member would be required to substitute its judgment and risk tolerance for that of its clients,” the firm said. 

Ric Edelman, the former chairman of the $291 billion advisory service Edelman Financial Engines, called a competency exam “fatally flawed” and said it would undermine efforts to teach Americans financial literacy. 

“Asking consumers to pass a test proving they are knowledgeable about investments before they can invest is like asking patients to pass a test about health care before they are permitted to swallow a pill,” he said. 

He instead suggested that FINRA encourage investors to rely on advisors that have already passed professional tests. 

Longtime ETF industry veteran Phil Bak said the restrictions would hurt financial innovations. He also argued against setting a standard for investor intelligence, particularly since there is complexity in understanding how stocks perform. 
“Is it not easier to understand how a covered-call strategy fund works than to understand whether a tech company’s algorithms subject the company to antitrust lawsuit risk?” he asked. 

What’s Next? 

A FINRA spokesman did not specify if the agency has a timeline for reviewing comments or submitting a formal proposal through its review process. Any proposal must be reviewed by its chief economist to assess possible economic impacts

The agency is required to submit a rule proposal to advisory committees and eventually its top board. If that board endorses the rule change, FINRA would then send it to the SEC for a self-regulatory organization (SRO) review and publication in the Federal Register. 

Exchanges have submitted SRO rule change requests in the past several years in their efforts to list spot bitcoin ETFs and other alternative strategies. If the timeline for bitcoin ETF filings is any guide, any rule based on FINRA’s proposal would take at least six months to take effect on top of its own internal process. 

Contact Dan Mika at [email protected], and follow him on Twitter 

Dan Mika is a reporter for He has previously covered business for the Ames Tribune and Cedar Rapids Gazette in Iowa, and BizWest Media in Fort Collins, Colorado. Dan holds a bachelor's degree in journalism from Truman State University.