Corporate & Securities Law

Exchange-Traded Products (ETPs) may be Hazardous to an Investor?s Financial Health

By Kate Maddox

On May 15, 2020, the Financial Industry Regulatory Authority (FINRA) issued a Regulatory Notice (?Oil-Linked Exchange-Traded Products?), which highlighted the fact that Exchange-Traded Products (ETPs), which provide different types of exposure to the oil market through several product structures, might not be understood by investors or investment professionals and that the performance of such products may be linked to unfamiliar indices or reference benchmarks, making them difficult for the average investor to comprehend.

An ETP is ?a security listed on an exchange that seeks to provide exposure to the performance of an index, benchmark or actively-managed strategy. The most common type of ETP is the exchange-traded fund (ETF).?

This Regulatory Notice noted that oil-linked ETPs are not only ?complex products that may not be suitable for some investors, such as retail investors with conservative investment objectives and long-time horizons,? but that they ?are complex products that could be easily misunderstood and improperly sold by registered representatives? who may not fully understand ?the heightened risks that these products raise.?

To demonstrate the volatility and risks that are associated with oil-linked ETPs, an example cited by FINRA in its Regulatory Notice is that ?as of April 22, 2020, the largest oil-related ETP had lost 41 percent of its value in one week.?

Moreover, in this Regulatory Notice, FINRA has reminded ?firms of their sales practice obligations in connection with oil-linked ETPs, including that recommendations to customers must be based on a full understanding of the terms, features, and risks of the product recommended; communications with the public must be fair and accurate; firms must have reasonably designed supervisory procedures in place to ensure that these obligations are met; and firms that offer oil-linked ETPs must train registered representatives who sell these products about the terms, features and risks of these products.?

In addition, all ?communications regarding oil-linked ETPs that present the benefits of the products must be balanced by a clear description of the risks, and may not omit any material fact or qualification that would cause such a communication to be misleading. For example, communications that present the benefits of oil-linked ETPs must include key risks such as the inherent fluctuations of oil prices and the speculative nature of futures investments, and must explain clearly that the ETP?s price will not track directly the spot price of oil.?

If you are an investor who has any concerns about your ETP investments with any brokerage firm, please contact attorney Steven B. Caruso in the New York City office of our firm at (212) 837-7908 for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

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Full post as published by Representing Investors on May 20, 2020 (boomark / email).