The involvement of retail investors in crypto and traditional finance over the past few years has reached new heights, which is now of concern to regulators.
FINRA urges members to educate retail investors
According to the Financial Industry Regulatory Authority (FINRA), the majority of retail investors do not understand the many complex investment products that are in the market and their associated risks.
This forced the regulator of the brokerage firm to issue a notice to all its members to act in the best interests of their clients.
The regulator has required its members to comply with the Regulatory Best Interest Act (Reg BI) which requires brokers to act in the best interest of clients.
Essentially, brokerage firms might need to start explaining the nature of some of their products to their clients along with their potential benefits and risks.
Beyond that, the regulator is also considering broader rules for these investment products. It is currently seeking the views of stakeholders on whether the current regulatory framework is sufficient to protect investors – a decision that many say precedes a new set of rules that would guide “complex products”.
Crypto investment products are 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 characteristics 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. Additionally, mutual funds and ETFs that offer strategies using cryptocurrency futures are also on the list. Thus, those offering crypto ETFs may need to operate under stricter rules.
According to FINRA,
“The features of these products are such that it may be difficult for a retail investor to understand the essential characteristics of the products and their risks and, therefore, are complex.”
He added that the risk becomes much higher when a retail investor accesses these products without professional assistance.
Notably, FINRA is not the only government agency concerned with the various financial products on the market, the Securities and Exchange Commission (SEC) has at various times criticized these products and urged investors to do their research before buying. invest.