February 4, 2020
Should the proposed rules apply to transactions in leveraged/inverse investment vehicles that are directed by a retail investor without any recommendation or advice from a broker-dealer or investment adviser? Why or why not?
Comment 1: I recommend that only the following be done: that when an investor opens a self-directed account, he be required to sign a form stating that he has read an explanation of the special risks associated with investment in leveraged/inverse funds an explanation similar to the Characteristics And Risks Of Options, that all investors are presently required to read. Reasons why are included in my answers to other questions below.
Should the proposed rules apply on a transaction-by transaction basis rather than requiring an initial account approval to transact in leveraged/inverse investment
vehicles? Why or why not?
Comment 2: NO. I find it difficult to believe that this question is even being asked. I do not day trade, and indeed I do not even check my account on a daily basis. Nevertheless there have been times when I needed to make a trade immediately, or face an assured loss, or fail to make an assured gain. The potential for loss would be greater if the trade involved a leveraged instrument. A per-transaction requirement would be criminal.
As proposed, the sales practices rules would require that a firm could provide account approval only if the firm has a reasonable basis for believing that the investor has
such knowledge and experience in financial matters that he or she may reasonably be expected to be capable of evaluating the risks of buying and selling leveraged/inverse
investment vehicles. Is this account approval standard appropriate?
Comment 3: This account approval standard is partially appropriate. The reasonable basis for believing that the investor has sufficient knowledge is that you know he has read the prospectus of the instrument he proposes to trade, and/or some other informational literature generally applicable to that instrument, along the lines of Characteristics And Risks Of Options. As for experience, there is a first time for everyone, and a first time for everything. The only way to get practical experience of the theoretical knowledge you already have is to...practice. Therefore, I do not think that experience in trading leveraged/inverse instruments should be required. However, prior experience in trading stocks, bonds or other simpler instruments should be required. Trading leveraged/inverse funds or ETFs is not the way to gain basic familiarity with the way trading in general works.
If not, what should the account approval standard be? Should it be tied instead, for example, to an investors ability to absorb losses, and if so how should a firm assess this?
Comment 4: It should NOT be tied to ability to absorb losses. What is meant by the said ability? Does it refer simply to the amount of good money one has that one is ABLE to throw after the bad? No one should create a trading strategy that involves doing that to any significant degree. On the other hand, some people with small net trading assets can create strategies using leveraged/inverse tools to enhance returns or, more importantly, reduce risk. Therefore, simple quantity of liquid assets should not be a criterion. If 'ability' to absorb losses means WILLINGNESS to do so, again, no one should have such willingness, but if they do, no one can legislate it out of them.
Is the investor information that the proposed rules would require firms to seek to obtain under the rules due diligence requirements appropriate, and would this
information effectively assist in forming a reasonable basis for assessing the investors knowledge and experience in financial matters as required under the proposed account approval standard? Why or why not?
Comment 5: No more investor information should be required than would be required for permission to trade simple options. Leveraged/inverse instruments are different than options, but are no more risky, complicated or difficult to trade than options. Therefore, an assurance that an investor has been asked to learn the general characteristics of leveraged/inverse vehicles is sufficient.
As proposed, should the rules require firms to seek to obtain the percentage of the investments that the retail investor intends to invest in leveraged/inverse
investment vehicles? Why or why not?
Comment 6: No. This would serve no purpose, for at least two reasons. First, leveraged/inverse funds are no more risky overall than options. It would be just as easy to overextend oneself in options positions as it would be in leveraged/inverse instruments, but firms are not required to know percentages or limit options investing in this way, so why require it for the other? Second, it is quite possible to construct trading strategies that are based entirely in leverage/inverse instruments, and have quite low risk.
Should the rules require firms to provide retail investors a short, plain-English disclosure generally describing the risks associated with leveraged/inverse investment
vehicles as part of the proposed account approval process?
Comment 7: Yes. This would be a very good idea. Although it is the investor's job to do due diligence, not all investors do so. A disclosure would be a useful favor to the less prudent and careful investor.
Should the sales practices rules include exceptions from the due diligence and account approval requirements for retail investors that have already traded in leveraged/inverse investment vehicles as of the rules compliance date?
Comment 8: Yes. Such investors have already learned, or are in process of learning, in the best way possible: experience. If they have already made mistakes in using leveraged/inverse instruments because of not educating themselves on them beforehand, those mistakes have already taught them in a way they will not likely forget, so there would be no point in putting them through the process mentioned.
The proposed rules also would not apply to, and therefore would not restrict a retail investors ability to close or reduce, a position in a leveraged/inverse investment
vehicle established before the rules compliance date. Do commenters agree that this is appropriate?
Comment 9: It is not only appropriate, it would be criminal to do otherwise, for the reason given in Comment 2.