FINRA Issues Notice Reminding Firms of Sales Practice Obligations for Certain Exchange-Traded Products

May 22, 2020

On May 15, 2020, FINRA issued Regulatory Notice 20-14 (Notice) in response to recent “extraordinary conditions” that have caused significant volatility in complex oil-linked exchange-traded products (ETPs). The Notice reminds broker-dealers that are members of FINRA (firms) of their sales practice obligations in connection with these ETPs and, similar to guidance FINRA has given in the past regarding leveraged and inverse ETPs, provides guidance relating to how FINRA believes these obligations should be applied to oil-linked ETPs. For example, because firms are required to have a reasonable basis to believe that the recommended transaction or investment strategy involving a security is suitable for the customer based on the information obtained through reasonable diligence of the firm or its associated person to ascertain the customer’s investment profile, an oil-linked ETP “likely would not be suitable” for a customer that is not experienced with the product, or that has a long-term time horizon for investing. Firms are also obligated to explain the potential benefits of ETPs to customers in a balanced manner that clearly describes the risks and does not omit any material fact or qualification that would cause such a communication to be misleading, and the Notice states that communications that include discussions of the benefits of an oil-linked ETP must include such risks as the volatility of oil prices, the speculative nature of futures investments and the ETP’s lack of a direct relationship to the spot price of oil. The Notice also indicates that firms “should consider whether to use heightened scrutiny and supervision of these ETPs” and that training should educate firms’ supervisors and associated persons about the risks of the complexity and structure of oil-linked ETPs.

The Notice is available at: https://www.finra.org/rules-guidance/notices/20-14


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Exchange-Traded Funds (ETFs)