SEC Issues Risk Alert Regarding Suitability of Structured Products in Retailed Sales

Tuesday, September 22, 2015

The SEC’s Office of Compliance Inspections and Examinations (“OCIE”) recently issued a “Risk Alert” highlighting deficiencies in broker-dealer supervision and compliance controls over retail Structured Securities Products (“SSP”) sales. SSPs are securities, often issued as corporate obligations of an affiliate of an underwriting broker-dealer. They derive their value from, and provide exposure to, a variety of underlying asset classes such as a single security, baskets of securities, indices, options, commodities, and/or foreign currencies. SSPs, which may or may not be listed on an exchange, typically have some form of embedded derivatives and may supply, among other things, principal protection, interest payments, or leveraged exposure to the referenced assets.

The Alert references deficiencies in the areas of suitability and supervision. In particular, OCIE found that all of the various examined firms failed to maintain or enforce adequate controls relating to determining the suitability of SSP recommendations and failed to conduct compliance and supervisory reviews of determinations by registered representatives of customer suitability in the SSPs, as required by internal controls.

Ultimately, the Alert offers some pointers for compliance by broker-dealers. It notes that broker-dealers should use the Alert as a chance to double-check supervisory and compliance procedures for general suitability criteria and especially for complex or structured products sold to retail customers. It also suggests that broker-dealers perform random internal audits to ensure compliance with its own rules.