The young jazz student plays an improvised solo that is longer, or more complex than his or her skills would merit. Dismayed by the student’s bravado, the class music teacher asks:
“Haven’t you heard of the K.I.S.S. method? KEEP IT SIMPLE STUPID!”
The rest of the band has a small laugh, and the young jazz student resolves to be more concise about soloing.
Securities offering documents, and especially those for structured products, have been criticized for years for their length and complexity. Market participants and regulators alike wonder if retail investors can understand these documents, and whether the length and complexity discourages retail investors from reading them at all.
In its April 2014 report (http://www.bis.org/publ/joint35.pdf), the Joint Forum advocated in favor of short summary documents for use in structured note offerings, among other types of investment products.
The Joint Forum consists of the Basel Committee on Banking Supervision (the BCBS), the International Association of Insurance Supervisors (the IAIS) and the International Organization of Securities Commissions (IOSCO).
The report identifies differences and gaps in the regulatory approaches to point of sale (POS) disclosure for different types of products found in the insurance, banking, and securities sectors. It sets forth eight recommendations, for use mainly by policymakers and supervisors, to assist them in considering, developing, or modifying their POS disclosure regulations:
- Jurisdictions should consider requiring a concise written or electronic POS disclosure document for the products.
- The POS disclosure document should be provided to consumers free of charge, before the time of purchase.
- A jurisdiction considering POS disclosure should consider requiring that a POS disclosure document disclose key characteristics, including costs, risks, and financial benefits or other features of the product.
- The POS disclosure document should be clear, fair, not misleading, and written in a plain language designed to be understood by the consumer.
- The POS disclosures should include the same type of information to facilitate the comparison of competing products.
- The POS disclosure document should be concise, set forth key information about a product, and may include, as appropriate, hyperlinks or references to other information. The POS disclosure document should make clear that it does not, in and of itself, provide complete information about the product.
- Allocation of responsibility for preparing, making available, and/or delivering the POS disclosure document should be clearly established, and the POS disclosure document should identify which entity is responsible for its content.
- A jurisdiction considering POS disclosure should consider how to use its regulatory authority to implement these POS recommendations.
Several regulators have already taken action that is consistent with the report. For example, in April 2014, the European Parliament approved an EU regulation relating to packaged investment products. The regulation will require product manufacturers and distributors to produce and provide to retail investors key information documents (KIDs) for certain types of structured products.1 Some would say that SEC Regulation S-K, which governs the cover page and the summary section of prospectuses, is designed in part (or used in practice) to achieve a comparable goal.2
In some markets, the private sector has made its own efforts to provide summary reference materials for structured products. In the U.S., following the adoption of the 2005 “Securities Offering Reform” rules, many market participants introduced summary materials in the form of free writing prospectuses. These documents are designed to effectively communicate the key terms and key risks of an offering, and often to help differentiate the product offerings of a broker from one another.
Additional changes may be forthcoming in the U.S. The SEC continues to monitor its disclosure rules, including the requirements of S-K.3 The Dodd-Frank Act provides the SEC with explicit authority to require broker-dealers to provide certain disclosures to retail investors before the purchase of an investment product or service.
The Joint Forum’s report reflects the desire, found among retail investors worldwide, for materials that will help them to digest the terms of what may be a complex instrument. These materials are not expected to set forth everything that an investor might wish to know, but can serve as a useful tool to facilitate an investor’s understanding.