WASHINGTON A top securities regulator is calling for a special investor alert to warn retail investors about the risks of trading off-exchange foreign currency contracts.
Luis Aguilar, a commissioner at the U.S. Securities and Exchange Commission, issued a statement this week expressing concerns about retail forex fraud.
His written statement came after the SEC approved a temporary rule that will allow brokers to continue to sell retail forex contracts to less sophisticated investors until the agency decides whether to implement more robust consumer protection rules prescribed by the Dodd-Frank Wall Street overhaul law.
"I am concerned about the risks to retail investors," he wrote in a statement that explained his vote on the temporary rules.
"My support of the promulgation of an interim final temporary rule was subject to the condition that the Office of Investor Education and Advocacy be directed to issue an investor alert warning investors about the potential risks and conflicts inherent in off-exchange foreign currency transactions."
The retail foreign exchange market is a niche market that lets average investors bet on the direction of currency price movements. But over the years, it also has been a market favored by fraudsters.
Additionally, regulators also have been concerned about risks posed by the use of leverage, which allows traders to increase their profits, but also can lead to larger losses.
Last August, the Commodity Futures Trading Commission adopted retail forex rules for the firms it regulates that would cap leverage at 50-to-1 for major currencies and require forex dealers to hold more capital and abide by certain disclosure, reporting and record-keeping rules.
The CFTC already had planned to adopt these rules before the enactment of Dodd-Frank, but the Dodd-Frank law required the CFTC to speed up the deadline on finalizing the rules.
The Dodd-Frank law additionally required other regulators, including the SEC, to impose similar rules on the retail forex dealers they oversee. If the regulators do not establish a regulatory regime for these transactions, then retail forex dealing would be prohibited.
The temporary rule approved by the SEC this week, which went into effect on Friday, allows the firms to continue dealing in retail forex contracts until the SEC decides whether or not to adopt a more comprehensive oversight regime.
The SEC said it will consider a number of avenues, including proposing new rules to protect consumers, allowing retail brokers to operate as they do today, and possibly prohibiting retail foreign exchange trading altogether.
SEC spokesman John Nester said the agency is in the process of developing an investor bulletin on retail forex, which is more detailed than an investor alert.
"It should be published soon," he said, adding that the bulletin will generally describe forex trading and its risks.
(Reporting by Sarah N. Lynch; editing by Carol Bishopric)