Regulators have been focusing on complex products for many years and we don’t anticipate a shift anytime soon.
Here are just a few regulatory references relating to complex products with one thing in common across all of them—education! It would be wise to familiarize yourself with them.
- NASD Notice to Members 03-71 (Non-Conventional Investments) reminds members offering non-conventional investments of many obligations to include training advisers regarding the features, risks and suitability of these products.
- NASD Notice to Members 05-26 (New Products) encourages firms to consider the complexity of a new product during the vetting process—whether the complexity would impair investor understanding of the product, and how complexity would affect the marketing and sale of the product. The notice highlights practices employed by some firms that NASD believed others should consider to comply with their various suitability obligations, avoid conflicts and plan for appropriate training and supervision. Every firm should ask and answer certain questions before a new product is offered for sale, including:
- Does such complexity impact suitability considerations and/or the training requirements associated with the product?
- Will the product necessitate the development or refinement of in-firm training programs for advisers and their supervisors? If so, how and when will the training be provided?
- FINRA Regulatory Notice 12-03 (Heightened Supervision of Complex Products) identifies characteristics that may render a product “complex” for purposes of determining whether it should be subject to heightened supervisory and compliance procedures, and provides examples of appropriate procedures. The notice clearly states that advisers who recommend complex products must understand the features and risks associated with those products. The adviser should be adequately trained to understand how a complex product is expected to perform in normal market conditions as well as the risks associated with the product.
How Do Complex Products Impact Commission Structures and Regulatory Requirements?
Certain complex products may involve a higher commission structure than less complex products. Regulatory requirements place a heightened focus and obligation on the adviser when recommending such products and that may justify the higher commission.
As discussed within part one of the Exemption FAQs released by the DOL and preamble to the BIC Exemption of the DOL Conflict of Interest Final Rule, firms can pay different commission amounts for broad categories of investments based on neutral factors, such as the time, complexity and level of expertise associated with recommending investments within different product categories.
During a recent webinar hosted by AI Insight, Marcia Wagner of The Wagner Law Group, stated, “Providing evidence of training for the distribution of more complex investment alternatives would support a finding that level of expertise was an appropriate neutral factor.”
Regardless of the training policy you and your firm may have, if it is not adequately followed and documented, it didn’t happen.
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