On April 14, 2015, in the opening speech before the North American Securities Administrators Association (the “NASAA”)5 at its Annual NASAA/SEC 19(d) Conference, SEC Commissioner Luis A. Aguilar addressed a variety of topics, including structured notes.6

Issues Relating to Structured Products

In his speech, Commissioner Aguilar expressed his belief that the SEC and state regulators should focus on combatting fraud involving complex products, including structured products sold to retail investors.

Commissioner Aguilar focused on a number of themes that have been addressed by the SEC, FINRA and the mainstream business press during the last several years:

  • the rapid growth of the structured note market;
  • the significant portion of structured notes sold to “retail investors,” including elderly investors, who may not have the ability to fully understand the products that they are buying; and
  • product-specific risks, including “…complex payoff structures, market risk on the reference asset or index, high fees, a lack of a liquid secondary market, opaque pricing, credit risk, and complicated payoff structures that can make it difficult to assess value, risk, and potential for growth.”

In detailed footnotes, the speech cites a variety of prior regulatory actions by the SEC, FINRA, and other regulators that many readers of this publication have previously studied for guidance.

Future Actions by the SEC and Other Regulators

While not proposing any specific measures, Commissioner Aguilar stated his belief that these products warrant additional regulatory attention. He suggested that:

  • the SEC staff needs to expand its focus on structured note disclosures to include all complex securities sold to retail investors; and
  • the SEC staff would benefit by formally adding both NASAA and FINRA as full partners in this effort. He noted that NASAA members and FINRA have extensive experience with complex products and can provide valuable insights into how these securities are being marketed to retail investors and how to ensure that investors are protected.

Some Additional Perspective

Retail vs. High Net Worth. Commissioner Aguilar cited statistics from various sources regarding “retail” sales. However, a number of these sources make little effort to provide detailed statistics that would distinguish between actual retail investors, on the one hand, and high net worth investors, on the other hand. For example, a significant majority of the structured notes sold in the United States are sold through private banking channels to high net worth investors with financial advisers, or through advisory channels. The speech and the cited references do not distinguish among distribution channels and could leave a reader with significant misperceptions regarding the market for these products and who the actual purchasers are.

Older Investors. The speech also suggests that structured products are marketed and sold in disproportionate amounts to seniors. Interestingly, in a joint report, The National Senior Investor Initiative, published on April 15, 2015, by the SEC’s Office of Compliance Inspections and Examinations and FINRA,the agencies found that there were at least seven other types of securities more commonly sold to seniors, including, for example, variable annuities, UITs, ETFs, non-traded REITs, and BDCs. There is no allowance made for the fact that seniors may represent a disproportionate percentage of the high net worth and private banking customer universe; to a significant extent, these investors may be most interested in yield enhancement as an investment objective rather than equity appreciation.

Investor Understandng. The speech references concerns regarding investor education and the level of financial literacy. However, no mention is made regarding the efforts undertaken by the industry to promote investor education, whether through the use of free writing prospectuses that provide product information and descriptions, or through websites and other freely-available information materials. The speech also does not reference the significant efforts that broker dealers have applied to training their registered representatives in recent years, which has occurred both as a response to regulatory guidance and an effort to help ensure that investors are understanding the products that they are purchasing.


Commissioner Aguilar also referenced recent efforts of different groups at the SEC, including the SEC’s “sweep letter” relating to “estimated values” and the efforts of the SEC’s Division of Enforcement and Office of Compliance Inspections and Examinations to review structured products. While not indicating any specific actions that will be taken, Commissioner Aguilar’s speech suggests that regulatory activity affecting the industry is not necessarily likely to end soon.