The North American Securities Administrators Association ("NASAA") advised broker-dealers to review sales practices for non-traditional exchange-traded funds ("ETFs"), warning that these products pose unique risks.
According to NASAA, ETFs have become increasingly popular among investors seeking liquidity and investment costs that are generally lower than actively managed mutual funds. NASAA explained that traditional ETFs are designed so that their performance is similar to that of their underlying assets over an extended period. Non-traditional ETFs, including those that are leveraged or inverse, operate differently than traditional ETFs and pose unique risks due to their complex nature.
NASAA urged firms that permit customers to hold leveraged and/or inverse ETFs to have sufficient supervisory procedures in place to avoid "unsuitable recommendations" and "inappropriate holding periods." NASAA stated that non-traditional ETFs are generally not suitable for retail investors who hold the ETFs for more than one trading session.
Commentary / Steven Lofchie
Firms should consider how they would develop Regulation Best Interest compliance procedures that take account of the different features of traditional and non-traditional ETFs.
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