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U.S. Securities and Exchange Commission

SEC Staff Issues Summary Report of Sweep Examination of Structured Products Sold to Retail Investors


Washington, DC, July 27, 2011 — The Securities and Exchange Commission staff today issued a report identifying common weaknesses seen in sales of structured securities products and describing measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.

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The report summarizes the results of a sweep examination of the retail structured securities products business of 11 broker-dealers, covering a cross-section of the industry. Structured securities products generally do not represent ownership of a particular asset (such as stock in a manufacturing company); instead, the products promise returns to investors based on the performance of one or more underlying assets.

Among other things, the staff observed that broker-dealers might have:

  • recommended unsuitable structured securities products to retail investors;
  • traded at prices disadvantageous to retail investors;
  • omitted material facts about structured securities products offered to retail investors;
  • engaged in questionable sales practices with customers.

Potential supervisory deficiencies were observed as well. In particular, there appears to have been a lack of training requirements for supervisors and registered representatives that market structured products to their customers. The report contains recommendations for improved surveillance of sales practices and enhanced training for sales and supervisory personnel.

“Sales of structured products to retail investors have increased over recent years and may continue to increase as they are marketed as a higher return investment alternative,” said Carlo di Florio, Director of the SEC’s Office of Compliance Inspections and Examinations. “This report could help companies strengthen their compliance programs to better address the issues we observed during our sweep and in subsequent exams.” 

Mr. di Florio added, “Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection.”

The staff report states that larger broker-dealers should focus on issues such as:

  • having adequate procedures and controls to prevent and detect possible abuses in the secondary market for structured securities products;
  • disclosing material facts regarding the structured securities products being offered;
  • requiring registered representatives and their supervisors to complete specialized training in structured securities products before selling these products to customers;
  • accurately listing structured securities products on customer statements;
  • having controls to independently review their desk prices of structured securities products in the secondary market;
  • having controls to adequately review the suitability of these products for customers; and
  • having controls to review customer concentrations in the structured securities products it sold.

The staff report states that smaller retail broker-dealers should focus on:

  • the suitability of structured securities products recommended to retail customers;
  • establishing, maintaining and enforcing proper supervisory procedures relating to suitability determination for purchasers of structured securities products; and
  • having adequate training for registered representatives who sell structured securities products and for their supervisors.

The examinations underlying the report, which concluded in 2009, were conducted by the following staff from the Office of Compliance Inspections and Examinations:

New York Regional Office: John M. Nee, Rosanne R. Smith, Linda Lettieri, Sonam Varghese, Lourdes Caballes, Ethan J. Allfree, Ellen N. Hersh, Jennifer Fournier, Susan Castillo, Kathleen Kuzmen, Dee-Ann DiSalvo, Christy Wolanski, Tamara R. Heller, Sarah J. Curran and Savitri Singh.

Chicago Regional Office: Thomas F. Murphy, Daniel R. Gregus, James J. Malo, Marianne E. Neidhart, Joshua M. Herbst, Stephen G. Vilim, John G. Haworth, Edward W. Holland, Ambar Freyre, David W. Kinsella, Christopher Caprio, Anna M. Mieszaniec, Thomas P. Conroy and John T. Brodersen.




Modified: 07/27/2011