Structured Products Americas: SEC will turn up the heat on the market, says leading lawyer

The US SEC is highly sceptical of the structured products market and higher regulatory standards are on their way, says lawyer

US SEC turns up the heat

A letter sent last month by the US Securities and Exchange Commission (SEC) to leading distributors of structured retail products shows it is "highly sceptical" of the market, warned a leading lawyer today.

Speaking at the Structured Products conference in Miami today, Linda Chatman Thomsen, a partner at law firm Davis Polk & Wardwell and a former director in charge of enforcement at the SEC, said the letter - which was sent to many issuers on April 13 - suggests higher regulatory standards are on the way. "There may be more specific guidelines issued, and more enforcement actions," she said.

Sent by Amy Starr of the SEC's corporation finance division, the letter focused on three key areas of concern. First, how structured investment products are described to investors, especially in relation to any principal protection being offered. Secondly, on the apparent inability of distributors to provide a value for complex products at the moment they are bought. The third key concern is over the ability (or inability) of distributors to provide liquidity over the full life of the products they sell.

The regulator's view of structured products is clearly "the view of people who see them when they go wrong, and not when the go right", said Thomsen. "If investors are hurt, we will see a lot of activity."

But she added: "The letter and its request for comment does provide the industry with an opportunity to demonstrate the value of the [structured] products."

The SEC is turning up the heat on the US structured products market at a time when distributors are frustrated by what they see as a lack of clear direction from regulators.

They gained only a little encouragement from another keynote speaker at the conference - Bill Hayden, senior director for emerging regulatory issues at the Financial Industry Regulatory Authority (Finra), the Washington, DC regulatory agency more directly focused on broker-dealer firms.

While Finra does not have a negative view of the structured products business, Hayden said it is a "new and in many ways risky area". He added: "For portions of the broker-dealer community, this is brand new territory. There are new firms coming into the market all the time."

However, Finra will not follow the lead of regulators in France, the UK and Hong Kong in trying to define complex products and their core elements.

"To define ‘complex' is not a desirable test because what is complex is will change significantly over time." Finra will instead continue to place the onus on distributors to ensure their customers have sufficient information to understand what they are buying, he said.

"There is difficulty even in getting a common understanding of [the terms] ‘product', ‘structure' and ‘complex'," said Hayden. "Achieving a standard nomenclature is a monumental task."