Investment Management Law: FINRA Notifies Firms about Commodity-Linked Securities

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Investment Management Law: FINRA Notifies Firms about Commodity-Linked Securities

FINRA Notifies Firms about Commodity-Linked Securities

FINRA has issued a Regulatory Notice detailing a firm’s obligations with respect to commodity-futures linked securities such as exchange-traded funds that invest in commodity futures. FINRA is concerned that firms and investors understand that performance of the security may “deviate significantly” from performance of the referenced commodity because of the deviation between futures prices and spot prices. FINRA reminds firms that reps must understand the products and receive proper training. Also, communications may not mislead investors by overstating the link with the underlying spot price, understating the risks of investing in commodity futures, or over-emphasizing the hedging benefits as compared to traditional investments. FINRA wants firms to adopt specific WSPs with respect to commodity-linked products.

OUR TAKE: FINRA is recognizing that commodity-linked products have filtered down to retail investors and are becoming more prevalent in a diversified portfolio. Firms must ensure that reps understand and communicate what they’re selling.

http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122289.pdf

Posted by Todd Cipperman at 10/21/2010 6:15 AM

Categories: Distribution and Broker-Dealers
Tags: commodity-linked securities futures exchange traded funds suitability

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