Issuers, distributors and others involved in the creation and sale of structured products cannot ignore the growing body of statements and actions by regulators relating to structured products. Due to the variety of structured products and that issuers may be different types of financial institutions, there is no single regulation or body of regulation applicable to the issuance, sale and marketing of structured products. You will find below many of the most significant US legal resources applicable to the issuers, structurers and distributors of these products. This is not a complete collection of the regulatory reference materials that may be relevant to structured products; however, these materials are intended as useful references for market participants.
- FINRA Releases and Publications Relating to Structured Products
- FINRA Enforcement Actions Relating to Structured Products
- SEC Materials
- Materials Relating to Structured Certificates of Deposit
- State and Other Materials
- REVERSEinquiries Newsletter
- 3/8/2022 – FINRA Releases Notice on Complex Products and Options
On March 8, 2022, FINRA issued Regulatory Notice 22-08 (Complex Products and Options). The Notice is FINRA’s most significant statement on sales of complex products since 2012.
- 7/19/2021 - FINRA Expands Scope of Filing Requirements
FINRA has adopted changes to FINRA Rules 5122 (Private Placements of Securities Issued by Members) and 5123 (Private Placements of Securities) requiring members to file retail communications which promote or recommend private placement offerings subject to the Rules’ filing requirements.
- 5/17/2021 – FINRA Disciplines Member Firm in Letter of Acceptance
FINRA disciplined one of its member firms in a letter of acceptance, waiver and consent relating to the failure to establish and maintain a supervisory system reasonably designed to achieve compliance with the firm’s suitability obligations in connection with sales of nontraditional and volatility-linked exchange traded products.
- 2/1/2021 – 2021 Report on FINRA’s Examination and Risk Monitoring Program
FINRA released its Report on FINRA’s Examination and Risk Monitoring program. This Report replaces the former on FINRA Examination Findings and Observations, and its Risk Monitoring and Examination Priorities Letter. The Report, in its new format, will be released annually.
- 7/21/2020 - FINRA Notice Addresses Retail Communications
FINRA provides guidance on retail communications concerning private placement offerings to retail customers.
- 6/25/2020 - FINRA Report on Artificial Intelligence in the Securities Industry
FINRA’s report details the ways in which financial services firms are using Artificial Intelligence (AI) to offer new products, increase revenues, cut costs and improve customer service. Financial institutions are allocating significant resources to exploring, developing, and deploying AI-based applications to offer innovative new products, increase revenues, cut costs, and improve customer service.
- 6/19/2020 - FINRA Rules Amended to Conform to Reg BI
FINRA is making changes to Rule 2111, the suitability rule to conform the quantitative suitability prong to the formulation is used in Regulation Best Interest (Reg BI), as well as to make clear the instances in which the FINRA suitability rule remains applicable.
- 6/5/2020 - FINRA Identifies Common Firm Practices in Preparing for Regulation Best Interest
FINRA reported some initiatives commonly undertaken by broker-dealers and investment advisers in preparing to comply by June 30, 2020 with Reg BI and the required brief relationship summary on Form CRS (Customer Relationship Summary).
- 5/28/2020 - FINRA Highlights Firm Practices
Reg BI establishes a “best interest” standard of conduct for broker-dealers and associated persons when they make a recommendation to a retail customer of any securities transaction or investment strategy involving securities, including recommendations of types of accounts.
- 5/28/2020 - FINRA Fines a Broker-Dealer for Violations Involving Early Rollovers of UITs
On May 28, 2020, FINRA announced sanctions against a broker-dealer, fining the Firm $1.75 million for providing inaccurate information to customers related to rollover costs incurred and for related supervisory violations. FINRA also ordered the firm to pay approximately $1.9 million in restitution, plus interest, to more than 1,700 customers in connection with early rollovers of Unit Investment Trusts (UITs).
- 5/15/2020 - FINRA Reminds Dealers about Sales Obligations Relating to Oil-linked ETPs
On May 15, 2020, FINRA, in Regulatory Notice 20-14, discussed its concerns relating to sales of exchange-traded products (ETPS) that provide exposure to the oil market.
- 1/9/2020 - FINRA Risk Monitoring and Examination Priorities Letter
This 2020 Risk Monitoring and Examination Priorities Letter describes the areas of focus for FINRA’s risk monitoring, surveillance and examination programs in the coming year, including sales practice and supervision, market integrity, financial management and firm operations.
- 10/16/2019 - FINRA Publishes 2019 Report on Examination Findings and Observations
On October 16, 2019, FINRA released its 2019 Report on FINRA Examination Findings and Observations.
- 10/8/2019 - FINRA Provides New Reg. BI and Form CRS Resource
FINRA’s Reg BI and Form CRS Firm Checklist provides a Q&A outlining the major requirements of the recent rulemaking package and explains some key differences between FINRA rules and the SEC’s Reg BI and Form CRS.
- 9/19/2019 - FINRA: Keep Advertising Simple
In Regulatory Notice 19-31, FINRA focuses on keeping marketing materials fair and balanced, as required by FINRA Rules 2210 – 2220, but also keeping those materials short and sweet.
- 7/19/2019 - FINRA Reminds Firms of Their Trade Reporting and Compliance Engine (TRACE) Reporting Obligations
FINRA issued a Trade Reporting Notice to remind firms they must report any transaction in a “TRACE-Eligible Security” unless an exception applies.
- 7/1/2019 - FINRA Increases Margin Requirements for ETNs and Options on ETNs
In Regulatory Notice 19-21, FINRA announced that ETNs will now be treated differently than investment grade debt securities under the maintenance margin requirements of FINRA Rule 4210(c). That rule requires strategy-based accounts to maintain equity equal to 25% of the current market value of all margin securities long in the account, and the greater of 5% of the principal amount or 30% of the current market value of the debt securities short in the account.
- 4/2019 - Equity Linked Notes are Subject to FINRA’s Markup Rule
FINRA will be reviewing member firms’ compliance with the mark-up or mark-down disclosure obligations on fixed income transactions under FINRA Rule 2232 (Customer Confirmations). FINRA added a new answer to its FAQs on Fixed Income Confirmation Disclosure.
- 2/21/2019 - FINRA Investor Alert – High-Yield CDs as Marketing Ploys
On February 21, 2019, FINRA reissued its alert on potential “bait-and-switch” sales tactics relating to high yield CDs. FINRA has received reports of promotions wherein investors are enticed by offers of CDs with above market yields and then pitched other, potentially riskier, high-commission products, such as annuities.
- 1/22/2019 - FINRA Releases and Publications Relating to Structured Products
On January 22, 2019, FINRA issued its 2019 Risk Monitoring and Examination Priorities Letter, which includes matters relevant to structured products. The Letter highlights online distribution platforms and regulatory technology as new priorities for FINRA in 2019. The Letter also points to suitability concerns and protection of senior investors as areas on which FINRA will continue to focus during compliance examinations.
- 12/7/2018 - FINRA’s 2018 Report on Examination Findings and Structured Products
FINRA released its annual report highlighting key observations from its recent examinations. This year’s report included several observations of particular relevance to the structured products industry.
- 8/23/2018 - Regulators Call Attention to Non-Traditional Index Funds
FINRA released a news alert for investors on custom-built index funds. Custom-built index funds, or non-traditional index funds, track custom-built indices that are constructed based on criteria commonly used by actively managed funds. FINRA’s newsletter is substantially similar to the SEC Investor Bulletin discussed in a prior issue. Both the SEC and FINRA highlight the potential risks associated with nontraditional index funds.
- 04/2018 - FINRA Zeroes in on Sales of VIX-linked Products to Retail Investors
In a targeted exam letter dated April 9, 2018, FINRA’s Member Regulation Department initiated a review of sales practices related to products linked to the Chicago Board Options Exchange Volatility Index (VIX) sold to retail investors. The exam letter is intended to identify and mitigate sales practice risks associated with recommendations to non-institutional investors of VIX-linked products, including unsuitable recommendations, misrepresentations and the appropriateness of any required disclosures to customers.
- 2/2018 - FINRA Annual Regulatory and Examination Priorities Letter
This FINRA 2018 Regulatory and Examination Priorities Letter identifies topics that FINRA will focus on in 2018, and these include some new topics as well as others that remain ongoing areas of focus. In this letter, one of the topics, suitability, relates to structured products. Also mentioned is new FINRA Rule 2165, which protects against financial exploitation of vulnerable investors, such as seniors.
- 10/2017 - FINRA Regulatory Notice 17-32, Volatility-Linked Exchange-Traded Products
In this regulatory notice, FINRA reminds its members of their sales practice obligations in connection with volatility-linked exchange traded products (ETFs and ETNs) including, without limitation, that recommendations to customers must be based on a full understanding of the terms, features and risks of the product recommended, sales materials must be fair and accurate, and firms must have reasonable supervisory procedures in place to ensure that these obligations are met when recommending these products to investors, with a particular focus on retail investors.
- 6/2016 - Remarks from the SIFMA Complex Product Forum, Thomas Selman, Executive VP Regulatory Policy, FINRA
Mr. Selman addresses issues for broker-dealers arising in connection with offerings of products that feature multiple contingencies, such as “worst of” features.
- 2/2016 - Investor Alert— High-Yield CD Offers Can Be Bait for High-Commission Investments
FINRA warns investors that advertisements promoting CDs with high rates may be a bait-and-switch tactic used to interest investors in completely different investments with high commission structures, such as fixed or equity-indexed annuities. The alert resulted from calls made to FINRA’s helpline for senior investors.
- 8/2015 - Sweep Letter Relating to Broker-Dealer Compensation
A letter to FINRA member firms requesting information about their broker compensation practices, including the identification of conflicts of interest arising from compensation policies.
- 10/2013 - FINRA Report on Conflicts of Interest
This report focuses on broker-dealers’ approaches to identifying and managing conflicts in three critical areas: enterprise-level frameworks to identify and manage conflicts of interest; approaches to handling conflicts of interest in manufacturing and distributing new financial products; and approaches to compensating associated persons, particularly those acting as brokers for private clients.
- 4/22/2013 - Interpretive Guidance Regarding the Use of Pre-Inception Index Performance in Institutional Communications
This interpretive letter to ALPS Distributors relates to the use of back-tested or hypothetical performance data for a new market measure in advertising and provides guidance for the use of that data in institutional communications.
- 4/9/2013 - Remarks From the National Compliance Outreach Program for Broker-Dealers
Chairman and CEO Richard G. Ketchum addresses regulatory concerns regarding complex and structured products and conflicts of interest.
- 12/2012 - FINRA Regulatory Notice 12-55 – Suitability
FINRA Rule 2111 (Suitability) became effective on July 9, 2012. In May 2012, FINRA issued Regulatory Notice 12-25, which provides guidance on the rule in a "frequently asked questions" format. This Notice addresses two issues discussed in Regulatory Notice 12-25: the scope of the terms "customer" and "investment strategy." In addition, FINRA has created a suitability webpage at http://www.finra.org/industry/suitability, which locates in one place questions and answers regarding FINRA Rule 2111.
- 7/10/2012 - FINRA Investor Alert: Exchange-Traded Notes—Avoid Unpleasant Surprises
This investor alert describes ETNs, leveraged and reverse ETNs, ETN trading, issuance, and redemption. This alert also warns investors of the difference between an ETN’s indicative value and its market price, as well as other risks associated with ETNs.
- 5/2012 - FINRA Regulatory Notice 12-25 - Suitability
This notice provides additional guidance on FINRA’s suitability rule, Rule 2111. Some of the additional guidance applies to sales practices in the structured products industry.
- 1/2012 - FINRA Regulatory Notice 12-03 - Complex Products
FINRA Regulatory Notice 12-03 is one of FINRA’s most significant statements relating to structured products, and discusses the heightened supervision of complex products, gives guidance to firms about supervision, and attempts to identify the characteristics that render a product “complex.”
- 11/16/2011 - FINRA Investor Alert: The Grass Isn’t Always Greener—Chasing Return in a Challenging Investment Environment
This investor alert discusses high-yield investment products such as floating rate loans, structured retail products, and leveraged products. The alert advises investors to ask certain key questions before changing investments, as well as to be wary of fraudulent high-yield investments.
- 5/2011 - FINRA Regulatory Notice 11-25 - Know Your Customer & Suitability
This Notice announced the new implementation date of July 9, 2012 for FINRA’s rules governing know-your-customer and suitability obligations, and provides guidance in response to some industry questions and concerns.
- 1/2011 - FINRA Regulatory Notice 11-02 - Know Your Customer and Suitability
The text of FINRA’s new know-your-customer and suitability rules is set forth in an attachment to this Notice.
- 10/2010 - FINRA Regulatory Notice 10-51 - Commodity Futures-Linked Securities
This Regulatory Notice focuses on four areas: (1) possible deviation between the performance of the commodity futures-linked security and the performance of the referenced commodity; (2) ensure communications are fair and balanced and provide appropriate disclosures; (3) conduct reasonable suitability assessments prior to recommending commodity futures-linked securities to customers; and (4) supervision and training of the firm’s registered representatives.
- 10/2010 - FINRA Regulatory Notice 10-52 - Free Writing Prospectuses
The content standards, principal review requirements and applicable filing requirements contained in NASD Rules 2210 (Communications with the Public) and 2211 (Institutional Sales Material and Correspondence) now apply to free writing prospectuses (FWPs) distributed by broker-dealers in a manner reasonably designed to lead to their broad unrestricted dissemination, as described in Rule 433 of the Securities Act. As a result, FINRA is withdrawing, in part, previous interpretative guidance from August 2006 that excluded FWPs from the requirements of Rules 2210 and 2211.
- 2/2010 - FINRA Regulatory Notice 10-09 - Reverse Convertibles
This Regulatory Notice discusses communications with the public regarding the promotion of reverse convertibles; ensuring a firm’s registered representatives review suitability before recommending reverse convertibles to any customers; and the supervision and training of a firm’s registered representatives.
- 12/2009 - FINRA Regulatory Notice 09-73 - Principal-Protected Notes
This Regulatory Notice discusses ensuring that communications are fair and balanced and providing appropriate disclosures; ensuring a firm’s registered representatives conduct reasonable suitability assessments prior to recommending principal-protected notes to customers; and training the firm’s registered representatives.
- 11/2009 - FINRA FAQ - Non-Traditional ETFs
This FAQ describes leveraged/inverse ETFs, the effects of the reset feature of a leveraged or inverse ETF on suitability, the requirements for suitability analysis, the suitability of leveraged and inverse ETFs for retail investors, concerns about treating leveraged or inverse ETFs as long term investments, guidance for firms as new complex or non-traditional ETFs are introduced to the market, and similar analysis applicable to leveraged or reverse mutual funds.
- 9/2005 - NASD Regulatory Notice 05-59 - Structured Products
This Regulatory Notice discusses providing balanced disclosure in promotion efforts; ascertaining accounts eligible to purchase structured products; dealing fairly with customers and performing suitability determinations; and supervisory control systems and training.
- 4/2005 - NASD Regulatory Notice 05-26 - New Products
NASD Regulatory Notice 05-26 discusses written formal procedures for vetting new products; and a survey of best practices.
- 10/2002 - NTM 02-69 - Brokered Certificates of Deposit
This notice provides guidance about brokered CDs (which include structured certificates of deposit), including sales practices and disclosures on customer account statements.
- 6/25/2020 - FINRA Fines a Broker-Dealer for Violations Involving UITs
FINRA sanctions a broker-dealer more than $3.6 million for violations involving UITs. A broker-dealer was fined for executing $935.2 million in trades over four years, which were unsuitable early rollovers of UITs, causing the customers to incur approximately $1.9 million in unnecessary sales charges.
- 9/6/2019 - FINRA Sanctions Representative and Member for Unsuitable Recommendation of Financial Product
A general securities representative settled FINRA charges for advising customers to purchase Leveraged and Inverse ETFs without understanding the specific risks and unique features. The member firm with which the representative was associated also settled charges for failure to supervise.
- 9/2019 - FINRA Updates Rule 2232 FAQs
FINRA updated its frequently asked questions about Rule 2232, which requires that FINRA members disclose in their confirms to retail customers their markups in corporate and agency debt securities if the dealer also executes one or more offsetting principal transaction on the same trading day as the customer transaction in an aggregate trading size that meets or exceeds the customer’s trade.
- 7/2/2019 - FINRA Sanctions a Brokerage for Failure to Reasonably Supervise Securities Transactions
On July 2, 2019, FINRA announced that it had imposed sanctions on a broker-dealer for supervisory failures. The sanctions, which totaled greater than $880,000, included approximately $558,000 in restitution to customers whose accounts were excessively traded by a former registered representative of the firm who was previously barred by FINRA in a separate disciplinary action.
- 10/2017 - FINRA Consent Agreement Relating to Volatility Products
In this action, FINRA fined a broker-dealer for unsuitable recommendations, training and supervision relating to sales of volatility-linked products.
- 10/2017 - Wells Fargo Clearing Services, LLC
A broker-dealer settled charges with the SEC relating to improper sales of structured CDs and notes. The broker-dealer had generated large fees by encouraging retail customers to trade structured products prior to their maturity and replace them with similar securities. The broker-dealer’s supervisory procedures were insufficient to prohibit these short-term trading activities.
- 8/2017 - FSC Securities Corporation
A broker-dealer was sanctioned by FINRA for insufficient procedures and supervision relating to the sale of leveraged and inverse ETFs to retail investors. The broker-dealer allowed these non-traditional ETFs to be treated as “buy-and-hold” investments by certain customers who lost significant sums.
- 6/2017 - Coastal Equities, Inc.
This broker-dealer was sanctioned by FINRA for insufficient due diligence and post-sale reviews in connection with the sale of leveraged and inverse ETFs. The dealer had written procedures for sales of those products, but did not follow them.
- 8/2015 - Wells Fargo Advisors LLC
This consent agreement addresses internal brokerage communications and training as to relevant transaction terms and risk factors in connection with complex products.
- 3/2014 - LPL Financial
This action does not arise out of structured products, but from the sale of other non-traditional investments. FINRA’s findings provide a useful “case study” as to the types of issues that a firm should consider in evaluating its own processes for sales of complex products.
- 12/15/2011 - FINRA Enforcement Actions: Wells Fargo Investments, LLC
FINRA fined Wells Fargo Investments, LLC for unsuitable sales of reverse convertible securities through one broker to 21 customers, and for failing to provide sales charge discounts on UIT transactions to eligible customers. The firm was required to pay restitution to customers who did not receive UIT sales charge discounts and to provide restitution to certain customers found to have unsuitable reverse convertible transactions. FINRA also filed a complaint against Alfred Chi Chen, the former firm registered representative who recommended and sold the unsuitable reverse convertibles and made unauthorized trades in several customer accounts, including accounts of deceased customers.
- 4/12/2011 - FINRA Enforcement Actions: Santander Securities Corporation
FINRA fined Santander Securities of Puerto Rico for deficiencies in its structured product business, including unsuitable sales of reverse convertible securities to retail customers, inadequate supervision of sales of structured products, inadequate supervision of accounts funded with loans from its affiliated bank, and other violations related to the offering and sale of structured products. The firm reimbursed more than $7 million for reverse convertible losses.
- 4/11/2011 - FINRA Enforcement Actions: UBS Financial Services, Inc.
FINRA fined UBS Financial Services, Inc., and required UBS to pay restitution for omissions and statements made that effectively misled some investors regarding the "principal protection" feature of 100% Principal-Protection Notes Lehman Brothers Holdings Inc. issued prior to its September 2008 bankruptcy filing.
- 10/20/2010 - FINRA Enforcement Actions: Ferris, Baker Watts LLC
FINRA fined the former Ferris, Baker Watts LLC for inadequate supervision of sales of reverse convertible notes to retail customers, as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at least 85 years old and customers with a modest net worth.
- 2/16/2010 - FINRA Enforcement Actions: H&R Block Financial Advisors, Inc.
FINRA fined H&R Block Financial Advisors for failing to establish adequate supervisory systems and procedures for supervising sales of reverse convertible notes to retail customers. FINRA also fined and suspended an H&R Block broker for making unsuitable sales of reverse convertible notes to a retired couple. The firm was ordered to pay restitution to the couple for losses they incurred. FINRA issued guidance for firms and for retail investors regarding risks, potential rewards and complexity of this popular structured product.
- 6/15/2022 – SEC Request for Comment on Certain Information Providers
On June 15, 2022, the SEC issued a request for comment to “help determine which ‘information providers,’ such as index providers, model portfolio providers, and pricing services, might come under the [SEC’s] definition of an investment adviser.” The request for comment discusses the roles played by these entities in, for example, the construction and calculation of indices, and analyzes the factors used to determine whether an entity is providing investment advice within the meaning of the Investment Advisers Act of 1940. The SEC is concerned about what it terms “significant discretion” in index methodologies, citing a law review article.
- 5/25/2022 – SEC Proposes Amendments to the Names Rule and ESG Disclosure
In an open meeting held on May 25, 2022, the SEC approved two new proposals: (1) a proposal to amend Rule 35d-1 under the of 1940 Act (the “Names Rule”), and (2) an enhanced environmental, social, and governance (“ESG”) disclosure proposal.
- 5/11/2022 – SEC Chair Gensler Speech at the International Swaps and Derivatives Association’s Annual Meeting
In a speech before ISDA’s annual meeting on May 11, 2022, SEC Chair Gary Gensler called attention to the use of derivatives within structured and complex products. His comments focused on the use of derivatives by investment companies registered under the Investment Company Act of 1940 (the “1940 Act”).
- 3/23/2022 – SEC Proposed Amendments to Regulation M
On March 23, 2022, the SEC proposed amendments to remove references to credit ratings from Regulation M. These proposed amendments would replace such references with alternative measures of creditworthiness and add recordkeeping obligations for broker-dealers. This aligns with the SEC’s direction under the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 to remove reference or reliance on credit rating and substitute, as appropriate.
- 1/31/2022 – SEC Filing Fee Table Exhibit
Effective Monday, January 31, 2022, the filing fee table exhibit requirements changed for many Securities Act and Exchange Act filings. For capital markets practitioners, it is important to understand that all Rule 424 final prospectus filings for shelf takedowns, from either Form S-3 or Form F-3, will require a separate filing fee exhibit, whether or not fees were prepaid. For “pay-as-you-go” filers relying on Rule 456(b), amended Rule 424(g)(1) and the relevant form (S-3 or F-3) requires a very specific table format. General Instruction II.F. and Item 16(b) of Form S-3 have been amended, as have been General Instruction II.G. and Item 9(b) of Form F-3. Examples of the new tables and detailed instructions are in Item 16(b) of Form S-3 and Item 9(b) of Form F-3.
- 12/7/2021 – The SEC Staff Statement on LIBOR Transition
On December 7, 2021, SEC Staff released a statement to remind investment professionals of their obligations when recommending LIBOR-linked securities, as well as to remind companies and issuers of asset-backed securities of their disclosure obligations related to the LIBOR transition.
- 11/8/2021 – SEC Cease and Desist Order relating to USO
United States Oil Fund, L.P. (“USO”) is an ETF that issues limited partnership shares traded on the NYSE Arca (the “Shares”). USO is also a commodity pool operator regulated by the Commodity Futures Trading Commission. In a Cease and Desist Order dated November 8, 2021 (the “Order”), the SEC noted, “[b]y failing to adequately inform the investing public, during the period from April 24 through May 21, 2020, of the specific constraints put on [USO] and, in turn, the impact that those constraints would have on [USO’s] ability to meet its investment objective, each of the above public filings [was] materially misleading.”
- 10/4/2021 – SEC Chair Gensler Statement on Exchange-Traded Products
On October 4, 2021, SEC Chair Gary Gensler directed the SEC Staff to study the potential risk of complex ETPs and to present recommendations for potential rule making proposals to address those risks. Chair Gensler referenced the various SEC and FINRA warnings about leveraged and inverse ETPs, noting even sophisticated investors are potentially at risk. He also stated that simply because these products meet the NYSE listing standards, it does not mean they are right for all investors.
- 7/19/2021 – SEC Cease and Desist Order relating to RIAs
In the SEC’s cease and desist order, investment advisers (“RIAs") registered under the Investment Advisers Act of 1940 in a dual registered broker-dealer were found exercising their discretionary authority over their clients’ advisory accounts to purchase exchange-traded notes linked to short-term VIX futures and keeping these ETNs in the clients’ accounts for inappropriately long periods of time.
- 5/20/2021 - Index Provider Settles with the SEC
An Index Provider is hit with a Section 17(a)(3) claim by the SEC when an undisclosed feature of the index methodology causes the index level not to reflect extreme volatility in the index. Holders of ETNs linked to the index were unaware of the disconnect, and the ETNs were accelerated the next day. Without admitting or denying the SEC’s findings, the Index Provider agreed to the Order and to payment of a monetary penalty.
- 11/9/2020 - SEC Charges Senior Index Manager for Insider Trading
On September 21, 2020, the SEC announced charges against a senior index manager at a well-recognized index provider for perpetrating an insider-trading scheme. The manager, who sat on the index committee, had purchased options of publicly traded companies prior to the index announcing additions or deletions of these companies from the index.
- 9/24/2020 - Additional Guidance on Regulation Best Interest
Reg BI requires broker-dealers and their associated persons who are natural persons to act in the best interest of their retail customers when making a recommendation. On August 2, 2020, the SEC released additional FAQs relating to the definition of “Retail Customer,” the Disclosure Obligation and the Care Obligation.
- 6/18/2020 - SEC’s OCIE to Begin LIBOR Preparedness Exams
On June 18, 2020, the Office of Compliance Inspections and Examinations of the SEC announced in a risk alert that it will conduct examinations of SEC-registered investment advisers, broker-dealers and investment companies, among others, to assess their preparedness for LIBOR’s expected discontinuation.
- 4/7/2020 - SEC Office of Compliance Inspections and Examinations Publishes Risk Alerts Relating to Upcoming Reg BI and Form CRS Compliance Inspections
On April 7, 2020, the SEC’s Office of Compliance Inspections and Examinations issued two risk alerts, one for initial examinations with focus on Reg BI, and the other for initial examinations with focus on Form CRS.
- 2/27/2020 - SEC Charges Broker-Dealer in Connection with Making Unsuitable Recommendations of Single-Inverse ETF Investments
The SEC announced on February 27, 2020 that it had settled charges against two entities of a broker-dealer after charging said broker-dealer with improper investment recommendation practices. The SEC stated the broker-dealer not only failed to reasonably supervise investment advisers and registered representatives who had recommended single-inverse exchange traded fund investments to retail investors, but also lacked adequate compliance policies and procedures with respect to the suitability of those recommendations.
- 2/11/2020 - SEC Frequently Asked Questions on Regulation Best Interest
SEC’s additional guidance on complying with Reg BI.
- 1/7/2020 - OCIE Examination Inquiries
On January 7, 2020, the SEC's Office of Compliance Inspections and Examinations announced its examination priorities for fiscal year 2020.
- 9/4/2019 - Frequent Principal and Trading Agency Cross Transactions Compliance Issues
The Office of Compliance Inspections and Examinations released a Risk Alert identifying the most common compliance issues, as identified by examinations of investment advisers, related to principal and agency cross transactions under Section 206(3) of the Investment Advisers Act of 1940.
- 6/5/2019 - SEC Publishes Final Interpretation of Investment Adviser Standard of Conduct
On June 5, 2019, the SEC also published an interpretation of the standard of conduct for RIAs under the Investment Advisers Act of 1940 (Advisers Act). The objective of the Proposed and Final Interpretations was to reaffirm and clarify certain aspects of an RIA’s fiduciary duty under Section 206 of the Advisers Act. In the SEC’s view, the Final Interpretation does not create new obligations.
- 6/5/2019 - Regulation Best Interest
On June 5, 2019, the SEC adopted Regulation Best Interest (Rule 15l-1 under the Securities Exchange Act of 1934 [Exchange Act]), which requires broker-dealers and their associated persons who are natural persons to act in the best interest of their retail customers when making a recommendation. The SEC also adopted Form CRS Relationship Summary, which requires registered investment advisers (RIAs) and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services (Rule 17a-14 and Form CRS under the Exchange Act).
- 9/11/2018 - Misselling of Leveraged ETNs Results in Monetary Penalties
Over the years, regulators, including the SEC and FINRA, have warned investors of the risks inherent in investing in complex exchange-traded products, particularly leveraged exchange-traded funds and exchange-traded notes. This time around, the SEC required a broker-dealer that was also a registered investment adviser to reimburse retail customers for losses due to unsuitable recommendations to buy and hold a three times leveraged ETN linked to the daily performance of an index of oil futures contracts.
- 8/6/2018 - Investor Bulletin on Nontraditional Index Funds Covers Issues Familiar to Structured Products Investors
The SEC recently published a new Investor Bulletin educating investors about features and potential risks of nontraditional index funds. Nontraditional index funds are index funds that track custom-built indices that are developed based on criteria commonly used by actively managed funds.
- 6/25/2018 - Broker-Dealer Sanctioned for Encouraging Early Resales of Structured Notes
On June 25, 2018, the SEC announced that a broker-dealer settled charges relating to recommended resales of structured notes and certificates of deposit to retail investors between January 2009 and June 2013. According to the SEC’s order, the SEC found that the broker-dealer generated substantial fees by improperly encouraging retail customers to trade structured notes prior to their maturity dates, even though the structured notes were intended to be held to maturity.
- 6/7/2018 - Commissioner Stein on Complex Products
On June 7, 2018, SEC Commissioner Kara Stein spoke at a conference and once again focused on complex products. Commissioner Stein noted the trend toward more complex products being sold to individuals.
- 2/2018 - Speech – Increasing Product Complexity: What’s at Stake?
Comments of Commissioner Kara M. Stein
- 2/2018 - OCIE Examination Priorities
The 2018 SEC's OCIE examination priorities are broken down into five categories: (1) compliance and risks in critical market infrastructure; (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB; (4) cybersecurity; and (5) anti-money laundering programs.
- 1/2017 - OCIE Examination Priorities
The 2017 OCIE examination priorities focus on electronic investment advice, money market funds and financial exploitation of senior investors. The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks.
- 9/2016 - SEC Order Relating to Broker-Dealer Training Materials
In this order, the SEC challenged a broker-dealer’s internal training materials relating to sales of reverse convertible notes due to the absence of certain information relating to volatility of the underlying assets and the option-like features of the reverse convertible notes.
- 12/2015 - SEC Investor Bulletin: Exchange Traded Notes
The SEC’s Office of Investor Education and Advocacy issued this investor bulletin to educate investors about exchange-traded notes in particular, how they differ from exchange-traded funds, the difference between an ETN’s indicative value and trading price, and to highlight certain risk factors that are associated with an investment in ETNs.
- 10/2015 - SEC Cease and Desist Order
SEC Cease and Desist Order relating to alleged misstatements and omissions in offering documents for notes linked to a proprietary index tracking G10 currency foreign exchange forward rates. The issuer was alleged to have taken unjustified markups, engaged in hedging trades with non-systematic spreads and trading in advance of certain hedging transactions.
- 8/2015 - OCIE – Broker-Dealer Controls Regarding Retail Sales of Structured Securities Products
Report by the SEC Office of Compliance Inspections and Examinations, focusing on branch offices, and assessing these firms’ compliance with suitability and supervision requirements in the Exchange Act and evaluating whether the firms effectively supervised and monitored activities and risks associated with sales of structured products to retail investors.
- 6/12/2015 - Request for Comment on Exchange-Traded Products
SEC request for public comment on topics related to the listing and trading of exchange-traded products on national securities exchanges and sales of these products by broker-dealers.
- 5/2015 - Speech: Structured Products – Complexity and Disclosure – Do Retail Investors Really Understand What They Are Buying and What the Risks Are?
Comments of Amy M. Starr, Chief, Office of Capital Market Trends.
- 1/2015 - Office of Investor Education and Advocacy – Investor Bulletin Relating to Structured Notes
Designed to explain key features and risk factors of structured notes to retail investors.
- 2/21/2013 - SEC Follow-up Letter to Sweep Letter Recipients re Estimated Initial Values
Letter contains the SEC’s updated guidance to issuers relating to the disclosure of estimated value of structured notes, including the discussion of the bond component and derivative component, secondary market values, disclosure of certain costs built into the price of the notes, related risk factors, repurchase prices by the issuer in the secondary market, and timing of conveyance of information. (Text of letter adapted from the SEC EDGAR website.)
- 8/2012 - SEC Investor Bulletin: Exchange-Traded Funds
This investor bulletin discusses various types of ETFs, factors to consider before investing in an ETF, the differences between ETFs and mutual funds, certain regulatory requirements, NAV and intraday value, premiums and discounts, arbitrage and the difference between index-based ETFs and actively managed ETFs.
- 4/13/2012 - SEC Sweep Letter re Structured Products
The SEC sent this letter to certain financial institutions regarding their structured note offering disclosures in their prospectus supplements and Exchange Act reports. It addresses certain issues with products names, products pricing and value (estimated initial value – see the SEC follow-up letter of 2/21/13 above), use of proceeds and reasons for offerings, plans of distribution, liquidity, issuer credit risk, tax consequences, referenced asset/index disclosures, disclosure formats, and exhibits.
- 7/27/2011 - OCIE Report: Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors
This report looked at retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry, for the time period 2008 – 2009, and found that firms (1) recommended unsuitable structured securities products to retail investors; (2) traded at prices disadvantageous to retail investors; (3) omitted material facts about structured securities products offered to retail investors; (4) engaged in questionable sales practices with customers. In response, it recommends larger broker-dealers focus on: (1) having adequate procedures and controls to prevent and detect possible abuses in the secondary market; (2) disclosing material facts; (3) requiring registered representatives and their supervisors to complete specialized training before selling these products; (4) accurately listing structured securities products on customer statements; (5) having controls to independently review their desk prices of structured securities products in the secondary market, and (6) having controls to adequately review suitability and customer concentrations.
- 6/1/2011 - SEC/FINRA Investor Education Alert: Structured Notes with Principal Protection: Note the Terms of Your Investment
This investor education alert discusses the unique features of structured notes with "principal-protection," how these notes may protect investments, an analysis of a “shark fin” payout structure, explanations of various terms used to define features of structured notes and questions a potential investor should ask before investing.
- 8/1/2009 - SEC/FINRA Investor Education Alert: Leveraged and Inverse ETFs - Specialized Products with Extra Risks for Buy-and-Hold Investors
This alert discusses the unique features of leveraged and inverse ETFs, addresses investor’s concerns and confusion regarding the performance objectives of leveraged/inverse ETFs, explains concerns about daily reset features and recommends research investors should conduct prior to purchasing these instruments. The alert has a particular emphasis on not treating these types of ETFs as buy and hold investments.
- 10/12/2007 - SEC Letters re ETN Programs and Regulation M
These SEC no-action letters address registered ETN programs with continuous distribution periods, and the circumstances under which relief from Regulation M restrictions may be provided for market-making and repurchase/redemption transactions. Relief was also granted under Section 11(d)(1) of the Exchange Act, Rule 10a-1 thereunder, and Rule 200(g) of Regulation SHO.
- 10/12/2006 - SEC on Equity-Linked CDs
This report discusses equity-linked certificates of deposit and advises investors to understand the specific terms and features of these products before making investment decisions. The report also highlights risks associated with equity-linked CDs.
- 5/21/1996 - SEC “Morgan Stanley” Letter re Abbreviated Underlying Issuer Disclosures
This SEC no-action letter applies to registered offerings of securities exchangeable for underlying common equity securities. It addresses the need for disclosures about the issuer of such underlying securities and the circumstances in which these disclosures can be abbreviated.
- 2/9/2016 - Investor Alert—High-Yield CD Offers Can Be Bait for High-Commission Investments
FINRA warns investors that advertisements promoting CDs with high rates may be a bait and switch tactic used to interest investors in completely different investments with high commission structures, such as fixed or equity-indexed annuities. The alert resulted from calls made to FINRA’s helpline for senior investors.
- 5/17/2012 - FDIC Warning on Market-Linked CDs
This warning addresses questions potential investors should ask before investing in market-linked CDs, such as principal guarantee, CD maturity, consequences of early withdrawals, return calculations, and CD redemption. The warning notes that these products are being marketed aggressively, including to seniors.
- 4/23/2012 - FDIC on Certificates of Deposit
This report discusses essential information on CDs and offers tips to potential investors who are considering investing in a CD.
- 12/3/2008 - SEC on High-Yield Certificates of Deposit
This report discusses issues relating to certificates of deposit that are important for potential investors to consider before making any investment decisions, such as maturity, call features, early withdrawal penalties, and various special considerations for brokered CDs.
- 10/12/2006 - SEC on Equity-Linked CDs
This report discusses equity-linked certificates of deposit and advises investors to understand the specific terms and features of these products before making investment decisions. The report highlights risks associated with these products, such as liquidity risk, call risk, FDIC insurance limits, caps and tax treatment.
- 3/17/2006 - NYSE Statement re Structured CDs
This statement issued by the NYSE addresses sales practice reviews that have raised regulatory concerns relating to the marketing of CDs that are linked to market indices, including the adequacy of disclosure materials used in connection with the sale of these instruments to customers and whether registered representatives and customers fully understand the product and how it differs from conventional CDs.
- 7/16/2019 - FDIC Eases Requirements on Deposit Tracking
The FDIC has detailed rules relating to account identification and recordkeeping in order to facilitate the determination of who is entitled to FDIC insurance payments in the event of the failure of an insured institution.
- 9/2018 - Structured Alternatives to Structured Products
We are frequently asked whether the payment profile of a structured note may be replicated in a different format, or ‘wrapper,’ that is not a debt security. This chart summarizes a number of alternatives, from UITs to repackaging vehicles, that may be used to offer structured product-like returns in a different format.
- 6/2018 - Summary of Listing Debt on the Better Alternative Trading System (BATS) Exchange
The national securities exchanges have been in competition for new listings over the past several years. For a long time, the choice was generally between the NYSE and NASDAQ. BATS joined the fray recently, and, as seen on the BATS listing requirement chart, it does not charge any listing fees for debt securities.
- 1/10/2018 - NYSE Regulation, Inc. Listed Exchange Traded Products Compliance Guidance
This memorandum provides a summary of NYSE policies and rules that most commonly apply to listed exchange traded products.
- 3/2017 - Massachusetts Secretary of State, Consent Order
In this action, a broker-dealer was sanctioned for, among other things, making unsuitable sales of market-linked CDs, where the registered representatives were incentivized by an internal sales contest.
- 10/2016 - DTC 871(m) Requirements for Equity Linked Instruments Seeking DTC Eligibility as of 1/1/2017
In this notice, DTC sets forth new requirements for obtaining and maintaining DTC eligibility for security in light of new IRC 871(m) provisions.
- 9/2016 - North American Securities Administrators Association, Annual Enforcement Report
The report summarizes the enforcement activity of its members during the most recent year, including its efforts relating to structured products.
- 7/29/2013 - New Jersey Bureau of Securities, Consent Order Relating to Sales of Non-Traditional ETFs,
(Subversion, training, unsuitable sales.)
- 7/10/2013 - Secretary Galvin Begins Investigatory Sweep of the Sales of High Risk Alternative Investments to Seniors
- 8/24/2012 - Massachusetts Secretary of State - Guidance in Connection with the Retail Sales of Structured Products by Massachusetts Registrants
This guidance discusses structured products, retail sales of structured products, written procedures and supervisory system, maintenance of records, and product-specific training. This guidance addresses concerns about the lack of complete, fair, and balanced disclosures, particularly with respect to risk/reward profiles.
- 4/2012 - Office of the Comptroller of the Currency, Activities Permissible for a National Bank
Discussion of securities and derivatives activities begins on page 52.
- 8/23/2011 - NH Enforcement Action: UBS Financial Services, Inc.
UBS consent order with NH Securities Bureau based on sale of Lehman investments. New Hampshire alleged that the sale by UBS of Lehman structured products to affected investors was unsuitable and that UBS failed to adequately supervise brokers who were selling the investments.
- Press Release
- Consent Agreement
- 9/5/1996; updated 4/20/2014: FDIC Statement of Policy Regarding Use of Offering Circulars in Connection with Public Distribution of Bank Securities
This statement of policy concerns the use of offering circulars in connection with the public distribution of bank securities by insured state nonmember banks. The FDIC is issuing this statement in view of its statutory duties relating to capital adequacy, the safety and soundness of insured banks, and its review responsibilities with respect to mutual-to-stock conversions of FDIC-regulated financial institutions. This statement of policy also is intended to protect insured state nonmember banks against the risk of serious capital loss or litigation that could result if bank securities are sold in violation of the antifraud provisions of the federal securities laws.