Finra issues notice about sales practice obligations for commodity futures-linked securities

By Angela McDaniels

Tacoma, Wash., Oct. 20 - The Financial Industry Regulatory Authority issued a regulatory notice to remind firms of their sales practice obligations when offering commodity futures-linked securities.

Finra said firms must ensure that communications with the public about these securities are fair and balanced, that recommendations to customers are suitable and that their registered representatives adequately understand and are able to inform their customers about these securities before they recommend them.

Securities that offer exposure to commodities have become increasingly popular, and they often use futures contracts to track an underlying commodity or commodity index, Finra noted.

"Firms should be aware that, in some cases, the performance of the commodity futures-linked security can deviate significantly from the performance of the referenced commodity, especially over longer periods," the authority said in the notice.

"The deviation could be either positive or negative, depending on market conditions and the product's investment strategy. This deviation can produce unexpected results for investors who are not familiar with futures markets, or who mistakenly believe that commodity futures-linked securities are designed to track commodity spot prices."

Finra said that firms should not suggest that a commodity futures-linked security offers direct exposure to the commodity's spot price, overstate the correlation between the two or understate the risks of investing in commodity futures.

Firms should also not overstate the hedging value of commodity futures-linked products, or commodities generally, by implying that their performance is always negatively correlated with equities or other asset classes, the authority said.

Finra also reminded firms that their duty to communicate about a product in a fair, balanced and truthful way is not alleviated by any disclosure made in a prospectus about the potential for a performance gap between futures and spot prices.

Questions about the notice can be directed to Laura Gansler (202 728-8275), associate vice president, Office of Emerging Regulatory Issues, or Richard Vagnoni (202 728-6934), senior economist, Office of Economic Analysis.

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