The SEC recently issued a public statement regarding certain leveraged and complex exchange traded products. The public statement begins by emphasizing that advisers and broker-dealers must actually understand the products they recommend to clients. The SEC wrote, “It is critically important for registered investment advisers and broker-dealers to implement robust and effective policies and procedures reasonably designed to prevent violations of the federal securities laws, which includes ensuring that their financial professionals understand the risks and purposes of the products they advise on and/or recommend to firm clients and customers. Moreover, firms must ensure that their financial professionals, including independent contractors acting on their behalf, actually follow in practice those firm policies and procedures.” The SEC explained that firms should not rely solely on individual advisers or registered representatives to be responsible for analyzing and understanding complex products.
The SEC recommended that “firms should consider which products are complex, suitable only for sophisticated investors, not suitable for investors who plan to hold them for longer than one trading session or not suitable for longer-term investment, so that the firm can take appropriate steps concerning financial professional access, training, and/or compliance monitoring and review.”
Relying on the Regulation Best Interest standard and an investment adviser’s fiduciary duty, the SEC said financial professionals who recommend a complex or risky product “should apply heightened scrutiny to understand the terms, features and risks of the product and whether such product fits within the client or customer’s risk tolerance and specific-trading objective, and whether it would require daily monitoring by the investor or the financial professional.”
