(NEW) Digital Assets
For the past several years, FINRA has encouraged firms to keep their risk monitoring analyst informed if the firm, or its associated persons or affiliates, engaged, or intended to engage, in activities related to digital assets, including digital assets that are non-securities. FINRA appreciates members’ cooperation with this request and is encouraging firms to continue to keep their risk monitoring analyst abreast of their activities related to digital assets on an ongoing basis
• FINRA Regulatory Notice 21-25 (July 8, 2021): FINRA Encourages Firms to Notify FINRA if They Engage in Activities Related to Digital Assets
Securities Offering Reform for Closed-End Investment Companies
The SEC adopted rules that will modify the registration, communications, and offering processes for business development companies (“BDCs”) and other closed-end investment companies under the Securities Act of 1933. As directed by Congress, the SEC is adopted rules that will allow these investment companies to use the securities offering rules that are already available to operating companies. August 1, 2020 was the effective date for all aspects of the final rule, subject to the exceptions noted in the Release.
• SEC Release No. 34-88606 (April 8, 2020) 85 FR33290 (June 1, 2020): Securities Offering Reform for Closed-End Investment Companies (Final Rule)
Fund of Funds Arrangements
The SEC adopted a new rule under the Investment Company Act of 1940 to streamline and enhance the regulatory framework applicable to funds that invest in other funds (“fund of funds” arrangements). In connection with the new rule, the Commission rescinded rule 12d1-2 under the Act and certain exemptive relief that had been granted from sections 12(d)(1)(A), (B), (C), and (G) of the Act permitting certain fund of funds arrangements. Finally, the Commission adopted related amendments to rule 12d1-1 under the Act and to Form N-CEN. The rule became effective on January 19, 2021.
• SEC Press Release 2020-247 (October 7, 2020): SEC Updates Framework for Fund of Funds Arrangements
Oil-Linked Exchange-Traded Products
Exchange-traded products (ETPs) provide different types of exposure to the oil market through several product structures, which some investors or investment professionals might not understand. Moreover, the performance of such products may be linked to unfamiliar indices or reference benchmarks, making them difficult for the average investor to comprehend. In particular, a number of these ETPs are designed to track daily price movements of specified crude oil futures contracts, such as those on West Texas Intermediate (WTI) light, sweet crude oil (referred to herein as “oil-linked ETPs”). Due to recent extraordinary conditions in crude oil markets, combined with the manner in which the products are structured, several oil-linked ETPs have experienced significant volatility and lost a substantial percentage of their value, with at least one ETP liquidating and another forced to halt the issuance of new shares and adjust its investment objective.
These concerns are not limited to oil-linked ETPs: some other commodity-linked products, such as natural gas ETPs, as well as volatility-linked ETPs, may share similar features and have been the subject of prior FINRA guidance and regulatory action. Based on FINRA’s experience with complex products broadly, some investors—as well as investment professionals recommending them—may not understand oil-linked ETPs’ investment objectives, how their performance relates to the “spot” (or cash) price of oil, or how the different product structures can impact their performance and the investor experience.
This Notice reminds 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.
• FINRA Regulatory Notice 20-14 (May 15, 2020): Oil-Linked Exchange-Traded Products.