On June 12, 2013, Celia Moore, Assistant Director of the SEC’s Structured New Products Unit, Division of Enforcement, and Richard Vagnoni, Senior Economist of FINRA, spoke in a panel at the annual North American Structured Products Conference. The title of the panel discussion was: "Regulators Panel: What Are the Responsibilities of the Issuer and the Distributor?" The panel was organized to address continuing questions that arise in the structured products market as to the proper allocation of legal responsibilities among offering participants.

The speakers used the opportunity to provide some useful reminders about how the SEC and FINRA have analyzed a variety of issues, and the approach they take in regulating the market.

Continuing SEC Attention. First, Ms. Moore noted that structured products remain a significant focus of attention for the SEC. The SEC has established structured product working groups within the Office of Compliance Inspections and Examinations (OCIE), as well as in its recently renamed Division of Economic and Risk Analysis. These divisions are additional to the relatively new Office of Capital Markets Trends, which has significantly focused on this market. These divisions, together with other personnel from the Division of Corporate Finance and the Enforcement Division, communicate with one another in order to monitor market developments.

Know Your Distributor. Both speakers encouraged issuers and underwriters alike to take appropriate means to ensure the quality and experience of their distributors for structured products. In particular, appropriate review should be made of distributors who may be new to structured products.

Responsibility of Underwriters and Issuers for Downstream Distribution. Ms. Moore suggested that a party, such as an issuer, could not absolve itself entirely from an inappropriate sale by a downstream distributor, simply because that distributor was the entity which made the sale to the actual investor, and had a duty to make a suitability determination. Although many of the most important suitability determinations will rest upon such a downstream distributor, other parties to the transaction are likely to have duties as well. Ms. Moore pointed to the 2006 Interagency Statement on Sound Practices Concerning Elevated Risk Complex Structured Finance Activities.11 This statement sets forth a variety of recommended practices for issuers and product manufacturers to take, whether or not they are making sales of the product to a customer. These duties include, for example, adopting appropriate approval and review procedures. And of course, inappropriate sales by third-party distributors can create significant reputational risks for the issuer.

Areas of Regulatory Focus. Both speakers identified a few common themes as to areas and practice that are more likely to attract regulatory scrutiny:

  • Products and disclosure documents involving complexity, opacity or ambiguities that might make it easier to perpetuate fraud.
  • Products characterized by a lack of liquidity.
  • Products involving conflicts of interest.

Ease of Access. The panelists noted that many complex products were becoming more available to retail investors, including through self-directed accounts. Some brokers have been more willing than others to enable these types of accounts to elect to purchase these types of investments. Ms. Moore noted that in these situations, additional caution was recommended to ensure that appropriate disclosures of risks were provided to the relevant investors, in order to help strengthen their ability to make better investment decisions.