March 15, 2020
Regarding sales practice rules for Leveraged-Inverse funds:
174 yes, with limitations. Due to the nature of these funds, transparency, guidance and oversight is warranted. However, every Leverage fund I have bought and sold to date had a very clear warning in the prospectus and on the purchasing page as to the high risk nature of the funds. Transparency and understanding of the danger is not a current problem in my experience. I have not seen any regulation on this issue, and that might be wise for new investors.
175 I see no problem creating a rule that establishes current best practices transparency at both the management and the broker-client level.
176 I see no problem with some form of approval process for individual investors, but within reason. Many rules in place regarding day-trading, futures, forex, and options are actually detrimental to the small investor. Many small investors are often left holding positions they might otherwise close had they been permitted to trade more freely at their own discretion. In my experience, this has been problematic when the futures market makes significant moves before the bell, then remains unchanged during regular trading, only to resume significant changes after hours when I am not permitted to open or close a position that might secure profit or prevent loss. This is more pronounced with leveraged funds. Yes, investors should be screened beforehand as to their understanding and readiness to manage the risk. But once approved, those investors must not be impeded in opening, closing, increasing or decreasing positions as suddenly necessary at any hour of trading, in any 24-hour window. I can understand forbidding two day-trades in the same fund in the same 24 hour period, but if properly approved, investors should be free to open or close any number of leveraged funds in the same 24-hour period with a view to protecting assets from unforeseen changes later in the day.
177 Consequently I firmly oppose applying these rules on a transaction-by-transaction basis. Either an investor is deemed capable of managing his own risk, or he is not. Approval for each transaction is ludicrous in a market that changes by the second.
178 While it is wise and ethical for an investment firm or brokerage to inform and vet their clients, ultimately the investor decides what risk he is comfortable taking on. The key difference between investing in leveraged funds and using options to invest, is the investor leaves the options and derivatives trading to the pros who manage the fund. Many new and small investors do not have the minimum 25K funds, knowledge, experience and approval to invest in options, futures, derivatives, or do more than 3 day trades in 5 business days. Their gains are greatly limited, and often hurt, by the trading that goes on after-hours by those with greater means. This after-hours trading that affects small investors negatively is a great injustice that is not addressed. The informed use of leveraged ETFs, which are managed by experienced professional derivatives traders, is one of the few ways a small investor can jump-start his investment early on. I have done this myself, by spreading my portfolio between standard funds, standard equities, and leveraged funds. Despite the current bear market, I expect the economy to recover. I expect to do well in 12 months. I have not sold my positions, but I have actually increased my overall footprint, including leveraged ETFs, while the normally expensive shares are affordable. I am aware of the risk. I am comfortable with it. I believe I have the right to make that call after I have been duly informed.
188 If the client has the funds, the client should be permitted to invest and risk 100% of those funds. There should not be pursuit of much more required information. Unless the client is engaged in options, or other trades that create a liability to the brokerage or other third party, vetting should be minimal and reasonable.
188 One key difference between commercial investors and individual investors is the latter hold these funds for a longer time, sometimes because they have no choice: The market fell overnight and it is to late to exit the position without cementing the loss. The position must be held until it improves. If an investor is not approved for futures or day-trading, they will be at a disadvantage until they are so funded and approved and need to know this in advance. But again, with this knowledge in hand, they should be free to make that decision with their own investment.
192 I have been actively trading leveraged ETFs now. I generally hold my positions, but I have sold positions and bought the same positions again as the market dropped. This will shorten the recovery time on my investments when the market returns. With the current volatile market, it may be necessary for me to close and open positions to improve or protect my investment. There are already severe restrictions on how often and when I can trade. I strongly oppose any further restrictions or requirements to be vetted. Current investors need to be grandfathered in. Period. Those who were a danger to themselves have already left the market.