FINRA has penalized many financial advisors for recommending volatility-linked exchange-traded notes (ETNs) without knowing the products or the dangers they presented to customers, in violation of Regulation Best Interest (Reg BI).
Retail investors seeking stability should not use these ETNs, which are meant to match short term volatility indexes. They need continual supervision, are heavily leveraged, and have the potential to lose value overnight. However, some brokers handled them like regular ETFs, promoting them to conservative investors or keeping them in client accounts for an extended period of time, according to FINRA findings.
Reg BI, which went into effect in 2020, mandates that brokers use caution, investigation, and competence when providing recommendations and have a solid reason to think those suggestions are best for the client. In these instances, FINRA discovered that the brokers were unable to describe the time horizons, risks, or workings of the products.
Suspensions, fines, and required remedial schooling are among the penalties. FINRA's message is clear: ignorance cannot be justified by complexity. You would better understand what volatility-linked products do if you sold them.
This case serves as a reminder to broker dealers that disclaimers cannot be trusted to ensure compliance. Before short term, high-risk products are added to client portfolios, supervisory systems must identify them. The defense of "did not comprehend" is insufficient when it comes to Reg BI int past , the present and the future.
