On June 26 and 27, Structured Retail Products hosted its annual industry conference in Boston. The remarks of two FINRA officials provide a useful update of FINRA’s views as to a number of issues affecting the industry.

Product Complexity

On June 26, Tom Selman, FINRA’s Executive Vice President, Regulatory Policy and Legal Compliance Officer, was interviewed at the conference about current issues. He referenced FINRA’s Regulatory Notice 12-03 on complex products1 as a useful compendium of FINRA’s guidance on the subject, which guidance remains valid today. Although the release did not provide a definition of “complex” that could be easily applied to all products, Mr. Selman encouraged industry participants to err on the side of viewing a product as potentially complex; he urged product manufacturers not only to consider product development under FINRA’s rule-making policy and public statements, but also to consider how they would be viewed in the context of potential arbitration proceedings with unhappy customers, and to view them from the perspective of an entity with a fiduciary duty to its customers. According to Mr. Selman, FINRA has no current plans to issue an update to 12-03.


Mr. Selman discussed FINRA’s examination process. He noted that the mere fact that a firm was offering structured products would not, in and of itself, increase the likelihood that the firm would be subject to an examination in any particular year.2  He also noted that the findings of FINRA’s 2013 report on conflicts of interesthave been integrated into the exam process, and that brokers should expect the report’s findings and conclusions to be addressed during the exam process.

Recent FCA Action

Mr. Selman discussed the UK Financial Conduct Authority’s recent fines imposed based upon a principal protected cliquet product.4  He observed that some of the pertinent facts could raise issues under the FINRA rules as well:

  • Excessively prominent disclosure of a maximum return that is highly unlikely, or impossible, to achieve.
  • A product with a very limited chance to generate a return in excess of its minimum return could be scrutinized under FINRA’s reasonable basis suitability rules.

Communications Rules

On Friday, June 26, Amy Sochard, FINRA’s Senior Director, Advertising Regulation, spoke as part of a regulatory panel. She noted that approximately 60 members of FINRA’s advertising staff are involved in the day-to-day review of materials, including a dedicated team focused on structured materials. This year, FINRA advertising will review approximately 100,000 items overall.

FINRA has reviewed more than 1,200 filings that were affected under the new rules that related to structured products. These materials include product brochures and structured product websites. (There have been few, if any, conventional “advertisements” for this asset class.) Mr. Selman indicated that FINRA provided comments on 75% of these filings, and that, perhaps alarmingly, in 50% of these comments, FINRA requested that the relevant broker not use those materials further.

Mr. Selman indicated that the following types of communications had raised the most significant issues:

  • Blast emails relating to structured products that did not provide the necessary disclosures as to the risks of a product, or even its structure.
  • Materials relating to ETN performance: these materials improperly showed the performance of the underlying  index or benchmark, instead of showing the relevant exchange-quoted prices for the ETN itself.

Among FINRA’s more regularly recurring comments on structured products materials generally were:

  • Not disclosing that the particular product is not suitable for all investors.
  • Not disclosing the possibility of loss of principal.
  • Not disclosing product fees and expenses.
  • Overstating the liquidity of a product.
  • Improperly disclosing to investors that a product’s performance will be “steady” or “stable.”
  • Improperly using back-tested performance information in retail marketing products.
  • Improperly implying that investments are safe.
  • Improperly glossing over the risks of a product or its complexity.

Notwithstanding these issues, and the high rate of rejection of proposed materials, FINRA believes that the quality of these materials generally is improving.

Ms. Sochard confirmed FINRA’s position that broker-dealers need not file structured product “free writing prospectuses” that are exempt from filing under SEC Rule 433. On June 26, the SEC approved FINRA’s advertising rule amendments that clarify this position.6

In general, FINRA expects to need four to six weeks to review materials that are submitted to it. That timing is expected  to improve over time as the quality of materials continues to improve. FINRA employs an expedited process for review of materials that involve only modest changes to materials that have been previously removed. Ms. Sochard stated that if there are materials that require immediate attention, the broker can phone the advertising department to discuss, and the department will attempt to accommodate that request. If a broker is planning to use new forms of communication, Ms. Sochard encouraged the broker to consider phoning the department prior to the submission in order to discuss.