In October 2014, in a speech at the SIFMA Complex Products Forum, Susan Axelrod, FINRA’s Executive Vice President of Regulatory Operations, reported a number of FINRA’s concerns that impact the structured products industry. A copy of her speech may be found at the following link: http://www.finra.org/Newsroom/Speeches/Axelrod/P601434.
Ms. Axelrod noted that in the present low interest rate environment, many retail investors have been purchasing more complex instruments in their search for yield, including structured products. In her speech, she focused in particular on rate-sensitive instruments, including curve steepeners and range accrual notes.
In particular, Ms. Axelrod noted: “First, firms that are going to make complex products available to customers have a duty to make sure investors fully understand how the products operate and the risks of each product. That begins with brokers having a full understanding of the products they sell and receiving training on the features of the product as well as their firm’s own suitability guidelines for the products. Brokers should understand whether a particular product is suitable for a particular client. When we examine firms, we also review the training provided to brokers to determine whether they understand the products they recommend. Having a full understanding of a product can help a broker conduct proactive conversations with his or her customer about product-specific risks.”
In a related speech, Norm Champ, the SEC’s Director of the Division of Investment Management, spoke about how his industry is addressing complex funds being sold to retail investors. A copy of his speech may be found at: http://www.sec.gov/News/Speech/Detail/Speech/1370543319219. Mr. Champ paid particular attention to the risks posed by alternative funds, and their significant recent growth. Disclosures of their strategies, risks, and holdings remains a principal concern, particularly the possibility of a disconnect between the strategies disclosed in a prospectus, and the strategies that a fund actually employs.