In February 2016, representatives from a variety of divisions of the SEC presented at the annual “SEC Speaks” series of seminars organized by the Practising Law Institute. A number of their comments addressed the structured products market.
Chair Mary Jo White indicated that, in the enforcement arena, the SEC will focus on, among other things, “the structuring, disclosure, and sales of complex financial instruments.” Chair White noted that in a variety of areas, the SEC would use its regulatory powers beyond the regulation of disclosures to fulfill its mission, including as a result of the complexity of today’s financial products.
Commissioner Kara Stein devoted a significant portion of her remarks to ETFs, including the market volatility that this class of products witnessed in August 2015. Commissioner Stein noted that the complexity of some ETFs makes it difficult for the average investor to understand them.
She noted in her speech:
Retail investors are being introduced to innovative ETFs that may offer attractive yield, but also feature more complex and other higher risk strategies. These may include currency hedged ETFs, smart-beta strategies, and bank-loan ETFs. While some new products are being hailed as exotic or innovative within the industry, others have been described as “toxic”.
I fear that the risk presented by some of these new products may not be fully understood by those who have invested in them.
Finally, Michael Osnato, the Chief of the Complex Financial Instruments Unit of the SEC’s Division of Enforcement, discussed potential enforcement sanctions in the context of structured products. He indicated that the Division may bring additional cases relating to structured products along the lines of its 2015 action related to an FX-linked structured product. The SEC may bring actions relating to complex securities based on a “corporate negligence” theory — for example, where there are supervisory failures or other failures to communicate within an institution that is designing a complex product