On January 24, 2017, at the Structured Product Association's Annual Legal, Regulatory & Compliance Update, Amy Sochard, senior director of FINRA's advertising department, provided an update as to the department's review of structured product marketing materials.
Ms. Sochard provided an overview of the application of the FINRA advertising rules to structured products, and the types of documents that need to be filed with FINRA's advertising department. Then Ms. Sochard compared filing practices and FINRA's reviews from 2013 to 2016. She noted that, in 2013, approximately 746 structured product offering documents were filed with the advertising department, compared to 129 in 2016. The reduction relates in part to changes in the FINRA rules that require fewer documents to be so filed. In terms of the types of products that were covered by these filings, she noted that in 2013, a larger portion of the filings related to more complex products, such as ETNs and curve steepener notes, while in 2016, more of the filings related to simpler products, such as market-linked CDs.
She indicated that in 2013, the advertising department made comments and requests for revisions as to approximately 88% of the documents that they reviewed; in fact, the advertising department requested that the filers cease entirely to use approximately 4% due to more significant deficiencies. In contrast, in 2016, Ms. Sochard indicated that only approximately 40% of the documents submitted required revisions. This improvement, in her estimation, related to the fact that filers had acquired more experience in complying with FINRA's rules, and had improved their risk and other disclosures. Filers also improved their graphic displays, such as charts and tables. In addition, because the filings tended to relate to simpler products, simpler disclosures could be created and filed.
Ms. Sochard concluded her presentation by noting that structured products are now being offered in the form of 1940 Act "wrappers," such as unit investment trusts. She expressed her concern that, without adequate disclosures, investors might confuse these products with more traditional mutual funds, and investors may not be made aware of their unique terms and risks. As an example of FINRA's concerns about the types of complex products that could be wrapped in a 1940 Act wrapper, she cited FINRA's Investor Alert on leveraged and inverse ETFs from August 2009. Accordingly, she encouraged market participants engaged in this area to exercise care in the preparation of marketing materials, and to train their personnel to properly sell such products.