In our last issue, we discussed the historical performance period of underlying reference assets that should be included in structured note prospectuses. In this issue, in response to questions received from market participants, we discuss the format of these disclosures.
The Morgan Stanley Letter and Item 201 of Regulation S-K. The SEC’s “Morgan Stanley” letter5 requires a prospectus for a structured product referencing the performance of a stock to set forth historic trading information as to that stock. Specifically, the letter requires “[i]nformation concerning the market price of the [reference stock] similar to that called for by Item 201(a) of Regulation S-K.”
In turn, Item 201(a) of Regulation S-K, which applies to prospectus and Exchange Act disclosures, requires, as to equity securities traded on an exchange (which is usually the case for structured notes), disclosure of “the high and low sales prices for the equity…as reported in the consolidated transaction reporting system or, if not so reported, as reported on the principal exchange market for such equity.”
As a result, in order to include disclosure of the “high and low sales prices,” many issuers, particularly in the early days of the structured note market, used a tabular format to set forth this information, much as might be included in the relevant issuer’s annual report.
In recent years, an increasing number of issuers use a graph, setting forth, for example, only the closing prices for the relevant underlying stock. This disclosure might not, strictly speaking, comply with the Item 201(a) requirements that would apply to an annual report or prospectus. However, the Morgan Stanley letter uses the term “[i]nformation…similar to that called for by Item 201(a).” (Emphasis added.) This text has been viewed by many as permitting the presentation of this information as a single graph, especially since some individuals believe that this presentation is a more user-friendly way of informing investors as to the historic performance. The graphic presentation is also similar to the format in which many investors review historical performance information when they refer to publicly available resources, such as webbased finance portals. (As many readers of this publication know, some issuers provide both a graph and a table.)
(Note that Regulation S-T, which governs filings with the SEC using the EDGAR system, contains formatting rules, such as Rule 304, as to any graphs that are part of a filing.)
Application to ETFs, Commodities and Indices. ETF shares trade on a national securities exchange. Accordingly, whichever format they choose, issuers will typically use the same format for ETFs as they do for single stocks.
In contrast, commodities, futures contracts and indices (whether equity indices or securities indices) are not explicitly governed by the Morgan Stanley letter. Of course, the Morgan Stanley letter is viewed by many in the market as a useful framework for considering the disclosures as to these other types of underlying assets. Accordingly, some issuers will use a presentation for these indices comparable to that which they would for individual single stocks. However, practice is not uniform on this point.