Agency should stick to regulating financial professionals, not consumers and investors like you
Today we’re going to talk about what's going on in the market, the stock market, the bond market, the crypto market. But before I get into that, as important as that is, I have to begin with something even more important: a new proposal from FINRA - FINRA Rule 2208. The proposal is insane. FINRA, the Financial Industry Regulatory Authority, is the organization responsible for regulating stockbrokers, financial advisors and the world of mutual funds and how they're all marketed. FINRA tries to protect consumers by creating rules and regulations that the industry has to adhere to. Okay, fine, we get that. But FINRA has gone a bridge too far with Rule 2208. This is an incredibly stupid proposal. FINRA is proposing that investors would be required to pass an exam in order to buy what FINRA says are complex products.
Now, let's face it, the world of Wall Street has gotten very complex indeed over the past several decades. There are investment opportunities that go far beyond the knowledge and experience level of many investors. And many people have lost a lot of money by buying these complex products without understanding them or by investing with the wrong assumptions in place, or simply by buying for the wrong reasons. Get rich quick; market timing; get in now; get out; buy what's hot, avoid what's not, and all that kind of nonsense. So I get it that there are complex products on the marketplace and FINRA is concerned that many investors are buying these products, not understanding them, and it's therefore proposing that you have to pass a test in order to be eligible to buy these investments.
Well, I guess we could say in theory that maybe somehow that might make sense until you look at what FINRA defines as a complex product. This includes, according to FINRA, ESG funds. These are mutual funds and ETFs that are focused on the environment, social and governance issues, helping people invest with their values in mind. Their complex products definition includes emerging market funds, target date funds. Target Date Funds? Are you kidding me? This is the most popular investment in 401(k) plans in the country. More investors own target date funds than any other single type of investment. And FINRA says they are complex, and they want you to pass a test in order to be able to invest in them. Bitcoin Futures Funds, Floating Rate Funds, Global real estate funds, multi-strategy funds, balanced funds, asset backed securities (which would include Ginnie Mae Funds. These are funds that invest in government bonds), high yield bond funds, variable annuities. All of these, FINRA says, are complex. So, great.
If we are going to have to have you pass a test in order to validate your competency to invest in these things, well, I have a few questions. Who's going to create the training materials to help investors prepare for the exam? And by the way, who's going to write those exam questions? How many questions will be on the exam? How will investors take the test? Will be at home, self-study or are you're going to have to go to a testing facility? Is it going to be under the auspices of an auditor? How are they going to prevent fraud? What score is going to be required in order for you to be deemed to have passed the test? Will the questions be adjusted for IRAs and 401(k)s? Because after all, complexity resides in the tax code, has nothing to do with the investments themselves.
And check this out. If you're a married couple and you open a joint account, are both of you going to be required to pass the exam? What happens if one of you fails? Lots of academic data has demonstrated that standardized tests are biased against women, minorities and immigrants. Is this going to be a new barrier to helping Americans broadly save for their future? And finally, if testing were implemented and you were to fail the test, what would happen then? Would you be required to liquidate your current investments and incur whatever taxes and penalties and surrender charges might be involved? This is crazy, and we have to make sure that we are not going to allow FINRA to implement this absurd proposal of requiring that investors pass an exam in order to buy investments.
A clearer path exists: Work with a financial advisor
A much better proposal is one that's already in place. There are lots of people who already have to pass exams: financial advisors, stockbrokers and insurance agents. They already have to pass very rigid examinations from FINRA and the SEC and the States. Why not just require that investors hire someone who has passed an exam, a professional, to help you protect yourself from your own inabilities? Examining investors? FINRA, it's a bad idea. Don't do it. By the way, I wrote a very long letter to FINRA as part of their public comment period. And if you would like to see the letter that I sent to FINRA, just go to TheTruthAYF.com.