Mar. 28, 2020
Secretary- Securities and Exchange Commission Washington, DC Sage Brokerage Holdings is pleased to comment on the proposed rule filing regarding the proposed new sales practice rules of customers trading "leveraged/inverse investment vehicles". We applaud the Commission recognition that trading these products requires a higher level of sophistication and understanding of derivatives and leverage. However, we would like to propose an approach to customer due diligence that builds on existing FINRA rules requiring diligence of customers trading derivatives, rather that requiring a totally new infrastructure within existing firms. Sage Brokerage Holdings is the parent of SageTrader LLC, an Introducing broker that services very active equity and options traders, most of whom qualify for portfolio margin. SageTrader LLC qualifies each trader for portfolio margin along with the clearing firm that the trader is introduced to. Please note that the principals and many of the staff at SageTrader were principals at FIMAT Preferred in 2005 when we pioneered the introduction of portfolio margin for our customers from 2005-2007 under the SEC Pilot program. We have now had 15 years of history with experiences of customers trading both equities and options with the leverage granted by portfolio margin, as well as the broker-dealers' experience in managing risk and margin for those customers. We would suggest that the Commission revise its requirements for those firms that already have been approved by FINRA for portfolio margin, to utilize their existing process to qualify customers for portfolio margin to qualify as well for the trading of leveraged and inverse investment vehicles. The purchase and sale of a double and triple ETF or a short sale of similar instruments under REG T have risks (and rewards) similar to buying an equity under the 15% margin requirement under portfolio margin rules. As you should be aware, the process for a customer to be approved to be eligible for portfolio margin treatment requires two steps, that are very similar to the qualifications that the SEC is proposing for approval to trade leveraged and inverse instruments. To be eligible for portfolio margin, each customer must be first qualified to trade uncovered short options; FINRA Rule 2360(B)(16) outlines the extensive due diligence required of member firms to first qualify customers who want to trade options. In addition, to be approved for trading uncovered short options, additional due diligence and approval is required. Then each customer wishing to trade under portfolio margin must undergo additional due diligence outlined in FINRA Rule 4210(G)(5) approved by FINRA in a separate portfolio margin application, which is designed to assess the customer's financial capability and risk tolerance for use of additional leverage As the Release states on page 189 (footnote 334), these due diligence processes includes information gathering on investment objectives, financial status , trading experience, and risk tolerance that is very similar to the proposed due diligence process suggested in the Release. Therefore it would seem duplicative and a burden on those member firms that already have WSPs to approve the trading of short uncovered options or already have existing approval from FINRA to grant portfolio margin to their customers to recreate an entirely new process for the approval of customers wishing to trade leveraged or inverse instruments. Therefore Sage recommends the following changes be made to Section G(2)(b); -That any member approved by FINRA to permit the use of portfolio margin by its customers be allowed to use their existing WSPs for portfolio margin to qualify those customers to trade leveraged and inverse instruments. The only additional requirement we would suggest is that the member firm provide an additional disclosure document regarding the specific risks of leveraged/inverse instruments relating to the unique structure of those instruments. Please note that we are NOT suggesting that leveraged/inverse instruments be permitted under portfolio margin separate from what the existing qualifications for portfolio margin instruments require. -We would propose that existing customers already qualified for portfolio margin not be required to go through the approval process again, subject to receipt of the new disclose document above. -We would urge the Commission to consider amending its proposals to allow those member firms not approved for portfolio margin that already have WSPs in place to approve customers for uncovered short options trading to incorporate additional procedures for approval for trading leveraged and inverse instruments. Again, given that the due diligence requirements are very similar under the existing and new proposed rules, it seems logical that a member firm be given the flexibility not to have an entirely separate process for similar products. Respectfully yours, Douglas Engmann, Chairman, Board of Managers Sage Brokerage Holdings, LLC 465 California Street, # 838 San Francisco, CA 94104 Ph: 415.733.3003 Fx: 415.781.4641