SEC Commissioner Urges Caution When Selling Complex Financial Products to Retail Investors

SEC Commissioner Kara M. Stein warned regulators and industry professionals to carefully consider the costs and benefits of marketing and selling complex products to retail investors.

In remarks delivered at the “SEC Speaks” conference in Washington, D.C., Ms. Stein asserted that technological advancements have increased the complexity of derivatives products, strategies and structures. While acknowledging the potential benefits, she noted the accessibility of complex products such as VIX-based futures to retail investors, and observed that these investors may not be fully cognizant of the attendant risks. She further highlighted the rise of leveraged and complex passive investment strategies, and posited that retail investors may not fully understand the added complexities of index investing.

Despite efforts to provide more effective financial education and enforcement actions targeting institutions for misleading retail investors, Ms. Stein said that market abuses related to complex products continue to persist. As such, she provided three specific recommendations:

  • the SEC, FINRA, and the exchanges should finalize the Consolidated Audit Trail and use it to better understand how these products affect investors and markets;
  • an exchange should only list complex products if they can also monitor the products for problems; and
  • industry professionals should recognize their responsibility and use their knowledge of such products to protect investors.

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