The rapidly growing list of new investments in exchange-traded funds (ETFs), exchange traded-products (ETPs) and complex cryptocurrencies is creating greater challenges in how broker-dealers stay in regulatory compliance when these new vehicles are marketed to investors on digital platforms.
"We're seeing a lot of what I would consider quick-hitter marketing pieces. And by that, I mean pieces of marketing that are, can be quickly digested by the viewer," said Benjamin Schneider, senior director of the marketing review department at third-party broker, ACA Foreside.
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Schneider, who manages the ETF review teams at ACA Foreside, was speaking at
The global
"When we go in to conduct an examination, we're going to start to ask questions about, all right, this was a new product, let us understand how it was approved," said Michael Gerena, senior director of FINRA's National Cause Program. "The key is always that everybody understands what they're selling."
Beyond having a defined process for approving a product, Gerena said firms need to consider whether there should be parameters for the type of investor it's marketed to and "suitability requirements."
Both FINRA officials and industry leaders referred to the extensive process leading up to when the
"Our clients are the ones creating those marketing materials, so [we were] making sure they understood what these rules and regulations are so that they can proactively start incorporating some of this [FINRA] feedback into the new marketing collateral that they're creating," he said.
Derek Ashworth, an associate director in FINRA's Advertising Regulation Department, said one of the marketing flags FINRA is looking at is how firms describe investors' exposure from one newly registered ETP or cryptocurrency to another.
"One of the primary concerns though was the use of this ETF nomenclature. And that continues to be something that we're on the lookout for, both for the
ACA Foreside, which works with six different issuers operating in the spot bitcoin and newer spot ether space, has a due diligence department that vets every new product that a new or existing client wants to offer and weighs the regulatory, litigation and reputational risks, Schneider said. They also weigh that against the type of client considering some might be new.
"These aren't just carbon copies of each other. Each of those products is different," Schneider said. "Understanding the product, reading that offering document is just incredibly important."
Another finding FINRA officials noted was that certain disclosures in the prospectus of a new product should also be included in marketing materials — and that both should match in being fair and accurate descriptions. Ashworth pointed to when a prospectus typically has a disclosure at the top that is in bold or underlined that notes the product is designed for a certain type of investor or that specific market conditions could adversely affect the performance.
"Those might be an indication — because they're being called attention to in the prospectus — an indication that perhaps that information needs to be in the marketing material," he said. "So that's kind of a tip that I share with my analyst team as we're reviewing communications."
However, Ashworth said that does not mean firms should disclose every single risk. Instead, they should focus more on the context being used to describe the new product.
"Fair and balanced doesn't require an exhaustive list of all risks, all drawbacks, perhaps even all warnings associated with the product or service. What you need to be thinking about is the context of the communication," he said. For "that disclosure to be more effective, less can be more because you don't want it to creep into so much information that it really loses its relevance and significance."
Ashworth also advised firms to weigh what features or benefits they intend to emphasize in their marketing. Meaning, if a fund is offering a high yield or high distribution, perhaps disclose certain risk factors that can lower potential results.
"For example, credit risk, return of capital, potential tax consequences," he said. "Think about the factors that may impact some of those particular benefits or features that we're discussing."
Gerena also advised firms that they need to make sure the sales team knows exactly what to say or not say, and how to respond to questions from investors and the public.
"You definitely want to look at their social media to make sure that they are putting out what you've already approved," he said. "Those are the type of questions that we're going to ask if we're looking into one of these products."
