Early in each calendar year, issuers of structured notes and structured CDs often revisit the question, “how many years of historical information for the reference asset should we set forth in our offering documents?” That is, with the recent completion of the prior year, and the ability to extend all “stub” performance information through December 31st of that year, should one or more older years be deleted from the offering document?
“Black Letter Law”
At least as to common stocks, the SEC’s 1996 “Morgan Stanley letter” 3 implicitly requires only two complete years of historical information, together with information for any competed quarters. This is because the letter refers to the requirement for a prospectus to include: “Information concerning the market price of the [Underlying Securities] similar to that called for by Item 201(a) of Regulation S-K.” In turn, Item 201(a) of Regulation S-K requires the presentation of historical stock information:
“for the two most recent fiscal years and any subsequent interim period for which financial statements are included, or are required to be included by Article 3-01 through 3-04 of Regulation S-X ( § 210.3-01 through 3-04 of this chapter), or Article 8-02 through 8-03 of Regulation S-X (§ 210.8-02 through 8-03 of this chapter) in the case of smaller reporting companies, as reported in the consolidated transaction reporting system or, if not so reported, as reported on the principal exchange market for such equity.”
Of course, readers of structured note offering documents will quickly note that most documents show more than this minimum requirement. However, the specific number of years set forth often varies among different market participants. For example:
- some will seek to show a fixed ten-year period;
- some will seek to show performance since the beginning of 2008, in order to capture the negative impact (on many market measures, at least) of the 2008 fiscal crisis.
- some will seek to show a specified number of years (greater than two full, and the current “stub” period).
Some underlying assets, including some types of proprietary indices, will have more interesting performance histories in some periods, and in some market conditions, than in others. (They may have been designed for that purpose.) Accordingly, issuers that link to these market measures may be interested in showing a period of time that reflects the performance in these different market environments, and the number of years selected may be designed to reflect these differences. (Of course, “cherry picking” only the periods of positive performance would be problematic under all applicable regulatory standards.)
All this being said, particularly for widely available, broad-based equity indices and ETFs, and for large-capitalization stocks, the specific number of years shown above the minimum is not mandated by any particular legal requirement. And we previously discussed,4 the Morgan Stanley letter’s requirements were imposed long before retail investors had easy access to historical index information through the Internet. Today’s issuers can have a modicum of confidence that investors who are interested in obtaining this form of information for periods beyond those presented in the prospectus will be able to find them without too much difficulty. Of course, the length of the period discussed in the Morgan Stanley letter should be satisfied or exceeded in all cases.