Across the equity compensation industry, recordkeeper‑affiliated broker‑dealers and advisors are recommending complex products—exchange funds, derivative overlays, structured notes—to employees as well as insiders subject to insider trading windows, Rule 144, and pre‑clearance policies. Too often, these recommendations ignore issuer policies and liquidity constraints, and the products involved are highly profitable for the firms that sell them—creating incentives that can work against participant interests. This asymmetry enables some advisors and broker‑dealers to prey on participants’ lack of awareness about issuer policies, liquidity constraints, true costs, and the real‑world risks of these complex products.
Beyond high fees, these structures carry additional dangers for employees and issuers: they can create the economic effect of using material non‑public information in more covert ways (by shifting exposure without an open‑market sale); exchange fund arrangements can effectively swap concentrated employer stock for a pooled basket; and certain derivatives can obscure true liquidity, tax timing, and mark‑to‑market risks.
We call on FINRA and the SEC to clarify that Know‑Your‑Customer (FINRA Rule 2090) and Suitability (FINRA Rule 2111) require explicit consideration of issuer restrictions, concentration risk, and practical liquidity when recommending such products.
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To FINRA and the U.S. Securities and Exchange Commission:
Stock plan participants frequently hold concentrated positions in employer equity subject to blackout windows, Rule 144 constraints, and company trading policies. Yet some recordkeeper broker‑dealers—leveraging employer plan relationships—promote or recommend complex products such as exchange funds, derivative overlays, and structured notes without evaluating whether those transactions are permissible under the employer’s insider‑trading policy. These offerings are often highly profitable for recommending firms, which can exacerbate conflicts of interest when employer policies and liquidity constraints are not accounted for.
We respectfully request that regulators clarify that, for employees as well as insiders receiving such recommendations, broker‑dealers and advisers must treat as essential elements of the customer profile under FINRA Rules 2090 and 2111 and comparable SEC standards:
We further request that the SEC and FINRA issue guidance or FAQs confirming that recommending such products to employees as well as insiders may violate KYC/Suitability when issuer restrictions, liquidity constraints, or concentration risks are not appropriately considered and documented.
This petition seeks regulatory clarification and improved investor protection. It does not allege misconduct by any specific firm. Nothing herein is legal or investment advice.
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This petition is organized by members of the equity compensation community. Organizer identity is withheld to keep the focus on the substance and to encourage broad participation.
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Issue guidance/FAQs reinforcing that issuer trading policies, liquidity limits, and concentration risks are core KYC/Suitability inputs for employees as well as insiders; caution against recommending complex products where conflicts are foreseeable without documented alternatives.
No. We support high‑quality advice and appropriate product use. The goal is clarity and investor protection for a specific population: stock plan participants and insiders.
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