Alice Yurke, partner in the firm’s Financial Services & Products Group, spoke with StructuredRetailProducts.com about regulations in the structured products market and best practices for companies facing questioning.
“Uncertainty in the regulatory environment will continue to pose significant challenges to the industry. As retail investors continue to search for better yields, regulators will continue to scrutinize issuers and distributors of structured products on the basis of suitability, disclosure and broker-dealer education,” said Yurke.
“Plus, the question of what constitutes a ‘complex’ product – and therefore subject to enhanced scrutiny not to mention a greater likelihood of enforcement actions by the regulators – will add to industry angst. The imposition of a fiduciary standard of care on broker-dealers may well happen in 2014, although the speed with which the SEC will move on this issue is still unclear, as is the question of whether the rules for broker-dealers will be different in certain respects from those imposed on registered investment advisers.”
When asked if heavier industry regulations would weigh down innovation within the U.S. structured products industry, Yurke said: “I don’t see heavier regulations, per se, as being the problem. I think the concern is with heavy-handedness in interpreting and enforcing existing regulations. This will affect innovation, particularly in the retail markets. Private bank clients and institutional investors will continue to demand products that are tailored to their specific needs and risk management concerns. There has been an interest in, for example, structured annuities on some fronts, although some platforms won’t carry them because of complexity concerns.”
When facing regulators, companies should “familiarize [themselves] with the FINRA Notices to Members on complex products, such as 12-03, which provides guidance to member firms about the supervision of complex products,” said Yurke.
“Second, keep detailed books and records about your interactions with clients and the basis on which you recommended certain products to them, particularly if they are retail investors. Lastly, make sure that your representatives who recommend complex products fully understand the features and risks associated with these products and provide ample training for such representatives to ensure that they continue to be capable of assessing product risks and features as new structures are introduced.”
“Uncertainty in the regulatory environment will continue to pose significant challenges to the industry. As retail investors continue to search for better yields, regulators will continue to scrutinize issuers and distributors of structured products on the basis of suitability, disclosure and broker-dealer education,” said Yurke.
“Plus, the question of what constitutes a ‘complex’ product – and therefore subject to enhanced scrutiny not to mention a greater likelihood of enforcement actions by the regulators – will add to industry angst. The imposition of a fiduciary standard of care on broker-dealers may well happen in 2014, although the speed with which the SEC will move on this issue is still unclear, as is the question of whether the rules for broker-dealers will be different in certain respects from those imposed on registered investment advisers.”
When asked if heavier industry regulations would weigh down innovation within the U.S. structured products industry, Yurke said: “I don’t see heavier regulations, per se, as being the problem. I think the concern is with heavy-handedness in interpreting and enforcing existing regulations. This will affect innovation, particularly in the retail markets. Private bank clients and institutional investors will continue to demand products that are tailored to their specific needs and risk management concerns. There has been an interest in, for example, structured annuities on some fronts, although some platforms won’t carry them because of complexity concerns.”
When facing regulators, companies should “familiarize [themselves] with the FINRA Notices to Members on complex products, such as 12-03, which provides guidance to member firms about the supervision of complex products,” said Yurke.
“Second, keep detailed books and records about your interactions with clients and the basis on which you recommended certain products to them, particularly if they are retail investors. Lastly, make sure that your representatives who recommend complex products fully understand the features and risks associated with these products and provide ample training for such representatives to ensure that they continue to be capable of assessing product risks and features as new structures are introduced.”