Issuers Balk At FINRA 'Complex' Proposal

The rule proposal could broadly redefine how ETFs are sold to the public.

Reviewed by: Dan Mika
Edited by: Dan Mika

The Financial Industry Regulatory Authority is taking feedback on a proposed rule that could dramatically alter how new ETFs are treated and how easily retail investors can trade them, a move that is drawing fire from some sectors of the industry. 

The proposal is broadly intended to protect retail investors from “complex” ETFs and mutual funds they may not understand, by in part requiring brokerages to test customers before granting them access and up to outright banning nonsophisticated investors from buying them. 

What counts as a “complex” product isn’t specifically defined in FINRA’s proposal, but it would go farther than the SEC’s current definition. SEC Chairman Gary Gensler used the word to describe geared ETFs last October when announcing a staff review of the exchange-traded product segment. 

FINRA’s description of a complex product expands across levered ETFs and crypto futures funds, suggesting any fund that uses derivatives may face additional scrutiny. 

Regulators are asking its members if self-directed investors should be required to complete a training course or make additional attestations to their trading experience before buying into those funds, or potentially restricting them altogether unless they have a minimum net worth. The proposal is also asking for feedback on whether it should add more restrictions on how complex funds advertise themselves. 

Derek Horstmeyer, a finance professor at George Mason University, said regulators are having to play catch-up with rapid growth of options exposure among the retail investor class, whether those options are embedded in ETFs or contracts traded on Robinhood and similar apps. 

He noted that retail investors are increasingly taking on high-risk trades in pursuit of outsized returns thanks to the ease of no-commission trading and support from communities like Reddit’s WallStreetBets, but with little consideration for implied costs and potential downsides. 

There’s also precedent for limiting unaccredited investors from accessing particularly risky investments, such as restricting access to most venture capital deals or private equity strategies to high net worth individuals. 

Minimal Hurdle? 

“I'd be curious what creative idea [FINRA] comes up with [in] regards to the options or highly leveraged ETFs,” he said. “I hope it's a minimal hurdle, but I'm guessing there will be a hurdle.” 

Potentially requiring exams or outright banning options-laden strategies could impede retail investors from buying nonvanilla strategies, and dampen the pace of new ETFs reaching the U.S. market by applying the “complex” label to anything with the implied risk of using options. 

“[Gensler] was talking about complex problems that created market risk,” said John McGuire, a partner at the law firm Morgan Lewis & Bockius that represents ETF issuers. “That's a far cry from what FINRA is talking about, saying these are things that investors may not understand.” 

FINRA also pointed to defined-outcome and time-dated ETFs in its request for comments, saying that investors may buy in the middle of the defined period and experience far different results than promised because those funds use options to manage risk. 

Innovator ETFs CEO Bruce Bond disputed that notion in written comments to, saying most of the flows into the firm’s buffer funds come before or just after the reset period. He also said the firm has never received a complaint from an individual investor or an advisor about the situation posed by FINRA. 

Bond argues that the regulator’s broad definition of complexity incorrectly lumps together risk management tools like defined-outcome products with far more volatile daily leveraged and inverse funds. 

“A move to define complexity without consideration of risk doesn’t really do anything to protect investors,” he said. “It implies the wrong thing about these ETFs and could minimize availability of innovative investment tools for advisors and investors, like approaches to gaining market exposure while dialing down risk.” 

FINRA is collecting comments until May 9 via its website or mail. 


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.