Structured products in the spotlight

Concerns over the mis-selling of structured products to investors in the US have prompted the National Association of Securities Dealers (NASD) to issue guidelines to ensure members fall within the scope of sales practice codes.

"This guidance is intended to advise firms about how they might go about making sure they are not in danger of violating the sales practices because of some confusion, perhaps about how to treat these products," said a spokesperson for the private sector body in Washington DC.

The guidelines were issued to members last Monday after the NASD conducted a review of its members that sell structured products. The assessment revealed that some of its members may be falling short of meeting 'sales practice obligations' when selling the products, particularly to the retail client base. These obligations include providing fair, balanced and accurate disclosure in promotional material, and complying with suitability obligations.

"We have determined, at least for the time being, that the existing regulatory structure and requirements we have in place provide the necessary tools to address firm conduct and for them to address their own conduct with respect to the sale of these products," said Gary Goldsholle, associate vice-president and associate general counsel, office of general counsel, regulatory policy and oversight in Washington DC. "Given there were some shortcomings in certain areas, we thought it would be helpful to guide firms' conduct towards where we believe it should be."

The NASD uses a broad definition of structured products as securities derived from, or based on, a single security, a basket of securities or an index. The products can offer either full protection of the invested principal, or limited or no protection of principal.

One head of structured products said some of the recommendations are unnecessary. "I like best practices but I think this goes over the line and I'm not sure it was well thought-out or well run by people," he said.