Regulators Working Together to Serve Investors
Commissioner Luis A. Aguilar
North American Securities Administrators Association<br>Annual NASAA/SEC 19(d) Conference<br>Washington, D.C.
April 14, 2015
Good morning. Thank you for that kind introduction. It is my honor to deliver the opening remarks for today’s North American Securities Administrators Association (“NASAA”) and Securities and Exchange Commission (“SEC”) 19(d) Conference. For those who are keeping count, this is my seventh year as the SEC’s liaison to NASAA. It has been a privilege to serve you in this role, which I have done since my early days as a Commissioner. Before I begin my remarks, however, let me issue the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the SEC, my fellow Commissioners, or members of the staff.
NASAA and the SEC have a long history of working together to provide a robust regulatory environment for businesses to grow and to protect the investors who fuel that growth. Today is a clear example of that partnership, where representatives from the SEC and state regulators come together to share ideas for increasing cooperation and collaboration. This partnership is crucial to achieving our common goal of protecting investors, maintaining market integrity, and facilitating capital formation.
I will start by taking a few moments to highlight some of the great work in our continuing battle against fraud. Here are a few examples of what the states have done, as reflected in NASAA’s 2014 Enforcement Report:
- State securities regulators received more than 9,600 complaints from aggrieved investors and conducted more than 5,300 investigations;
- States undertook about 2,200 administrative, civil, and criminal enforcement actions involving more than 3,000 respondents and defendants;
- States reported criminal actions that resulted in more than 1,800 years of incarceration — the highest in the last five years — and more than 670 years of probation; and
- States imposed more than $600 million in investor restitution orders, and monetary fines and penalties of more than $70 million.
The SEC enforcement staff has also been busy. In Fiscal Year 2014, the SEC received about 16,000 tips and complaints from investors; opened more than 1,000 investigations; commenced more than 670 civil and administrative actions; worked with criminal authorities to file more than 120 criminal cases; and obtained more than $2.7 billion in disgorgement and almost $1.4 billion in penalties.
In particular, and a topic I’d like to discuss today, the SEC has been active in the structured and new products area. In Fiscal Year 2014, the SEC brought a number of enforcement actions involving complex financial instruments, several of which were handled by a specialized enforcement unit — the SEC’s Complex Financial Instruments Unit (“CFI”). These cases included enforcement actions relating to subprime mortgage-backed securities offerings, disclosures in collateralized debt obligations, and the sale of residential mortgage-backed securities. In addition, earlier this year, the SEC brought a fraud action against the credit rating agency Standard & Poor’s for misconduct relating to its rating of certain complex commercial mortgage-backed securities, and for hiding critical information from investors.
Currently, the CFI unit is focusing on structured and new products sold to retail investors, and the Commission expects future enforcement cases in this space. Relatedly, the SEC’s examination priorities for 2015 will focus on, among other things, registrants that develop new structured products and offer them to retail investors.
I note that NASAA is also concerned about so-called “new products.” In fact, a key enforcement trend cited in NASAA’s 2014 report points to the risks of “new products,” such as digital currencies like Bitcoin, being touted through classic fraudulent schemes. This focus is appropriate. Indeed, an investor’s constant quest for the next big thing plays right into the hands of fraudsters, who often use the complexity of new products to hide their schemes.
The fraud and abuse connected to these “new products” is particularly troubling, in light of the ongoing need to improve investors’ readiness and their ability to spot the danger signs of risky investments. This need is not a new development. A 2012 SEC staff study on investor financial literacy found that retail investors — particularly the elderly and minorities — lack basic financial literacy skills. Although there have been some efforts over the years to address investor financial literacy, we are still nowhere near where we should be. This is particularly troublesome, as investment products are becoming more complex and harder to understand.
To address these issues, the Commission and NASAA must continue its partnership to serve and protect investors. To this end, strong communication between us is crucial. State securities regulators are often the first to receive tips and complaints from harmed investors and the first to identify fraudulent conduct occurring within their local jurisdictions. We need to make sure that our communication is effective and ongoing, so the SEC staff can be alerted to new and developing scams and frauds. Of course, this needs to be a two-way communication.
Similarly, the Commission and NASAA members would both benefit from greater collaboration in implementing the Commission’s rules. State securities regulators have extensive experience in working closely with issuers and investors. This experience and expertise provide NASAA members with an important perspective that would be beneficial to the SEC. In addition, greater collaboration and cooperation would enable NASAA members, among other things, to have better insights into Commission rulemakings, policies, or activities that impact local jurisdictions. By ensuring that the Commission and state regulators work closely together, we can ensure a win-win situation for both investors and our capital markets.
Our mutual collaboration will make our capital markets safer and more vibrant, and ensure that it remains the envy of the world.
Today, I will focus on two areas:
- First, the need for the Commission and state regulators to focus on combating fraud involving complex securities — including structured securities sold to retail investors; and
- Second, the need for the Commission to cooperate and collaborate with state regulators to implement the Regulation A amendments of the JOBS Act, and to work together in other areas where our responsibilities overlap.
The Risks Posed by Complex Securities to Retail Investors
In determining how to invest their money, investors face a bewildering array of options. Indeed, given the low interest environment that’s been prevalent these past years, many investors may feel that their savings and investments do not provide sufficient “upside potential” toward meeting their financial goals, such as paying for college, buying a home, and planning for retirement. As a result, they are more likely to chase yield by buying investments touting higher returns. However, oftentimes, these investment products can be very opaque and complex for retail investors to fully appreciate the risks involved. Unfortunately, as NASAA has pointed out, yield-starved investors become easy prey for fraudulent schemes that are cloaked as investments in complex securities.
Complex securities are difficult to define because they vary widely depending on the nature of their underlying securities and/or the complexity of their trading strategies. In general, however, “complex securities” refer to securities that often involve embedded derivatives and may include equity-indexed annuities, leveraged and inverse exchange-traded funds (ETFs), principal protected notes, and reverse convertibles. Complex securities can also include exchange-traded products, or ETPs, and alternative mutual funds. The difficulty in defining the exact contours of what constitutes a complex security also makes it difficult to ascertain the size of the market. One thing is clear, however, complex securities have been increasingly marketed to retail investors in recent years. To give you some idea about the characteristics of the complex securities market, here are some data on ETPs and the alternative mutual fund market:
- First, the total asset growth of ETPs in the U.S. rose to more than $2 trillion in March 2015. Historically, retail investors and their advisers hold an estimated 50% of ETP assets in the U.S.
- Second, the alternative mutual fund market grew from about $76 billion in assets at the end of 2009 to over $311 billion in assets at the end of 2014. The growth of this market was fueled by the growing interest in the retail market.
These data points indicate that the retail market for complex securities will continue to grow in the years to come.
Now let’s talk about one particular type of complex security known as structured notes — which has now become a $45 billion market — and where the registered offerings are targeted at retail investors. In fact, recent data shows that an estimated 99% of all purchasers of these products are retail investors. These securities are issued by large financial institutions and offer returns that are linked to the performance of a reference asset or index. In their most basic form, structured notes are investment products that typically have a fixed maturity that includes a bond component and an embedded derivative. What isn’t always made clear are the risks of these debt look-alikes — of which there can be many. As the SEC recently pointed out in an Investor Bulletin, the risks of these products include, among others, the products’ complex payoff structures, market risk on the reference asset or index, high fees, a lack of a liquid secondary market, opaque pricing, credit risk, and complicated payoff structures that can make it difficult to assess value, risk, and potential for growth. Moreover, there are a wide variety of structured notes that have different risk profiles — some of these examples include principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, and hybrid notes that combine multiple characteristics.
Structured notes grabbed widespread public notoriety in 2008 when Lehman Brothers filed the biggest bankruptcy in U.S. history. Lehman Brothers had sold unsecured debt called “principal protected notes” that became worthless when the firm collapsed, and investors lost billions of dollars as a result. In essence, the securities sold as “principal protected” were really not “protected;” in fact, the “protection” that was offered was tied to the creditworthiness of the issuer, which cratered along with Lehman Brothers. These products have been referred to as “Trojan horses” that ultimately enter into an investment portfolio and destroy people’s life savings.
A year after the market crash, the number of issuances for structured notes fell by more than 1,200 issuances and their value decreased by $4 billion — from 7,217 issuances worth about $38 billion in 2008 to 5,933 issuances worth about $34 billion in 2009. The market has since bounced back with ferocity, however. In 2014, structured notes reached 10,732 issuances valued at more than $45 billion.
Because these products may be difficult to understand and can pose great risks to retail investors, they warrant more regulatory attention. In fact, the SEC staff has increased its focus on improving disclosure with respect to structured notes by requiring enhanced disclosures of pricing and valuation at the time of issuance of structured notes. In 2013, for example, letters requesting additional disclosures were sent to several issuers, including nine of the most active issuers of structured notes. Moreover, the Division of Corporation Finance has an office called the Office of Capital Markets Trends that has led interdivisional efforts — including the Division of Enforcement, the Division of Trading and Markets, and the Office of Compliance Inspections and Examinations — to specifically look at issues relating to structured notes.
Notwithstanding these focused efforts on structured notes, investor advocates have questioned whether the Commission has done enough to disclose the risks of these products. They have also questioned whether the current disclosure regime is enough to address the risks associated with complex investment products. The concern raised is whether understanding these products requires an investor to “understand concepts that either make no sense or are so complex that they require the knowledge and sophistication of a highly trained financial professional to understand them.”
These concerns are valid and deeply troubling. A bedrock principle of the federal securities laws is that issuers must be prepared to disclose all material risks presented by their securities in a way that investors can understand. Complex products that lack such disclosures run counter to this principle. That’s particularly true when the products are targeted to retail investors.
To this end, although the staff has focused on structured notes, there is more that can be done as to the complex securities market in general. For example, there are two steps the Commission could take right away to address this market more broadly. First, the SEC staff needs to expand its focus on structured note disclosures to include all complex securities sold to retail investors. Second, the SEC staff should not go it alone and would benefit by formally adding both NASAA and FINRA as full partners in this effort. NASAA members and FINRA have extensive experience with complex products and can provide valuable insights into how these securities are being marketed to retail investors and how to ensure investors are protected.
The protection of retail investors is paramount and demands immediate attention.
Enhancing the Partnership between State Regulators and the SEC
Next, I want to discuss how the SEC and NASAA members can work together more effectively. Shortly after I became a Commissioner and realized how limited our resources were, I considered ways that we could increase collaboration and cooperation between the SEC and NASAA. Specifically, in early 2009 — in fact at the NASAA Winter Enforcement Conference on January 10, 2009 — I raised the possibility of embedding a NASAA representative at the SEC. In my view, having someone at the SEC would provide the states with an unfiltered view into the Commission’s activities. In addition, a NASAA representative could also provide the Commission with a real-time voice regarding the states’ perspective on a number of important issues. For a variety of reasons, the idea did not get traction back in 2009, and, like many good ideas, was overtaken by the demand of other priorities. However, I had never forgotten that idea, and recently found an opportunity to again start the dialogue.
That opportunity came with the recent amendments to Regulation A.
Regulation A has been a longstanding exemptive regime under the Federal securities law that allows companies to raise capital without all of the costs of full registration, so long as they provide the investing public with certain critical disclosures about the company and the securities being offered. The Regulation A amendments recently adopted by the Commission, commonly known as “Regulation A-plus,” made several significant changes to this regime, including increasing the dollar amount that can be raised from $5 million to $50 million. Specifically, the new rules created two tiers of issuances that provide a higher ceiling for use of the Regulation A registration exemption: “Tier 1” for securities offerings of up to $20 million in any 12-month period; and “Tier 2” for offerings of up to $50 million in the same period.
The path from proposing stage to adoption involved the difficult issue of state preemption. As you know, at the proposing stage, the Commission proposed to preempt the application of certain state blue sky requirements with respect to all offerees in Regulation A offerings, including both Tier 1 and Tier 2 offerings, and all purchasers in Tier 2 offerings. In addition, the proposed amendments capped Tier 1 offerings at $5 million.
While the Commission ultimately preempted state registration and qualification requirements for Tier 2 offerings, the adopting rules provide the states with a greater role than what was contemplated in the proposal. First, unlike the proposed rules, the Commission did not preempt state review as to Tier 1 offerees. Moreover, at my suggestion, the Commission raised the Tier 1 offering ceiling from $5 million to $20 million. I greatly appreciate Commissioner Piwowar’s support in this effort, as well as the rest of the Commissioners who voted unanimously to support it.
Furthermore, as under the proposed amendments, the adopted rules give the states a chance to preview Tier 2 offerings. Under the adopted rules, first time Regulation A-plus issuers must publicly file their offering statements with the Commission at least 21 days before qualification. This will allow the states to require issuers to file such material with them for a minimum of 21 calendar days before any potential sales occur to investors in their respective states.
Moreover, as was always the case, state regulators retain the powers to investigate and bring antifraud enforcement actions involving Regulation A-plus issuers, or against any broker-dealers involved in unlawful conduct in a Regulation A-plus transaction.
Nonetheless, because the use of Regulation A is divided between those involving the states’ review process in Tier 1 and those that do not in Tier 2, the regulation of these offerings provides a challenge. Clearly, fraud in Tier 2 offerings will still land on a state regulator’s doorstep. As a result, I explored ways that the SEC and NASAA could increase communication and provide NASAA with insight into the SEC’s activities. To that end, I reintroduced the idea that I first had back in 2009 — to allow a NASAA representative to be embedded at the SEC. I found a receptive audience with Chair White, and this idea is now being pursued. Specifically, the SEC and NASAA are in discussions to assign a state representative to the SEC to be involved in the staff’s assessment of Regulation A-plus offerings. This arrangement will provide the SEC staff with the benefit of the experience that state regulators have in reviewing the offerings of the smaller companies expected to use Regulation A-plus.
In addition, I believe that a state regulator representative embedded in the SEC can go a long way to providing a bridge between Tier 1 and Tier 2 offerings and provide the states with a holistic view of issuers using Regulation A-plus. This should provide enormous benefits for both the state securities regulators and the Commission. I hope that we’re able to finalize this arrangement before the Regulation A amendments go into effect.
In my view, having a state regulator representative as part of the review team will create synergies that will go well beyond Regulation A-plus and, hopefully, will broaden over time into other areas. Indeed, I believe we should also explore having a state regulator representative embedded with the SEC’s Division of Enforcement.
To conclude, I want to highlight the tremendous efforts of the staffs of the SEC and the NASAA members in protecting investors. I am proud to be part of this group of hardworking public servants. I appreciate your efforts in continuing the good fight on behalf of our nation’s investors.
Thank you for having me. Thank you for everything that you do. Enjoy the rest of the conference.
 NASAA Enforcement Report: 2014 Report on 2013 Data, pp. 3, 6 (Oct. 2014), available at http://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
 U.S. Securities and Exchange Commission, FY 2015 Budget Request By Program, p. 54, available at https://www.sec.gov/about/reports/sec-fy2015-budget-request-by-program.pdf; U.S. Securities and Exchange Commission, Select SEC and Market Data: Fiscal 2014, p. 2, available at http://www.sec.gov/about/secstats2014.pdf.
 See U.S. Securities and Exchange Commission, Agency Financial Report, p. 155 (Fiscal Year 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf.
 SEC Press Release, SEC Announces Charges Against Standard & Poor’s for Fraudulent Ratings Misconduct (Jan. 21, 2015), available at http://www.sec.gov/news/pressrelease/2015-10.html.
 SEC’s Office of Compliance Inspections and Examinations, National Exam Program: Examination Priorities for 2015, p. 2, available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf (last visited Mar. 27, 2015).
 NASAA Enforcement Report: 2014 Report on 2013 Data, p. 8 (Oct. 2014), available at http://www.nasaa.org/wp-content/uploads/2011/08/2014-Enforcement-Report-on-2013-Data_110414.pdf.
 SEC Press Release, SEC Issues Financial Literacy Study Mandated by the Dodd-Frank Act (Aug. 30, 2012), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484290.
 U.S. Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors, p. iii (Aug. 2012), available at http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf.
 See Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (Apr. 5, 2012).
 SEC’s Office of Compliance Inspections and Examinations, National Exam Program: Examination Priorities for 2015, p. 2, available at http://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2015.pdf (last visited Mar. 27, 2015).
 See John F. Wasik, De-mos, How Safe Are Your Savings?, p. 2 (2011), available at http://www.demos.org/sites/default/files/publications/How_Safe_Savings_Demos-Nation.pdf.
 See id. at pp. 2-3.
 North American Securities Administrators Association, NASAA Cautions Investors Not to Stumble When Interest Rates Fall Flat (Feb. 1, 2012), available at http://www.nasaa.org/10146/nasaa-cautions-investors-not-to-stumble-when-interest-rates-fall-flat/ (last visited Mar. 27, 2015). In 2011, the Commission charged a brokerage firm and its senior executive for defrauding several school districts in Wisconsin by selling them unsuitable risky and complex investments funded mostly by borrowed money. SEC Press Release, SEC Charges Stifel, Nicolaus & Co. and Executive with Fraud in Sale of Investments to Wisconsin School Districts (Aug. 10, 2011), available at http://www.sec.gov/news/press/2011/2011-165.htm. The investments were complete failures, despite assurances to the school districts that it would take “15 Enrons” for the investments to fail. Id. In Fiscal Year 2014, the SEC brought several actions involving complex financial instruments, many of which relate to financial crisis-related cases. See U.S. Securities and Exchange Commission, Agency Financial Report, p. 27 (Fiscal Year 2014), available at http://www.sec.gov/about/secpar/secafr2014.pdf.
Jon Eisenberg, 2014 SEC and FINRA Enforcement Actions Against Broker-Dealers and Investment Advisers, K&L Gates, Legal Insight, p.6 (Dec. 2, 2014), available at http://www.klgates.com/files/Publication/a07c5cd0-229d-4f05-8c7a-17718b4af45a/Presentation/PublicationAttachment/6a94694e-9457-44aa-bbcb-1f2570045ee4/GE_Alert_12022014.pdf.
 See Wells Fargo Advisors, A guide to investing in exchange-traded products, p. 1, available at https://www08.wellsfargomedia.com/downloads/pdf/investing/etfguide.pdf (last visited Apr. 9, 2015) (“Exchange-Traded products (ETPs) at their core are securities which derive their value from a basket of securities such as stocks, bonds, commodities or indices, and are traded similar to individual stocks on an exchange.”)
 Alternative funds typically hold more non-traditional investments — such as global real estate, commodities, leveraged loans, start-up companies and unlisted securities that offer exposure beyond traditional stocks, bonds and cash — and employs more complex trading strategies. See Financial Industry Regulatory Authority, Investor Alerts, Alternative Funds Are Not Your Typical Mutual Funds (June 11, 2013), available at http://www.finra.org/investors/alerts/alternative-funds-are-not-your-typical-mutual-funds (last visited Apr. 9, 2015).
 Financial Industry Regulatory Authority, 2015 Regulatory and Examination Priorities Letter, pp. 3, 6-7 (Jan. 6, 2015), available at http://www.finra.org/sites/default/files/p602239_1.pdf (“Some of the products we address are complex and may be subject to substantial market, credit, liquidity or operational risks. In some cases, products previously available only to sophisticated investors have been modified and are now offered to retail investors.”).
 Deutsche Bank Markets Research, US ETF Market Monthly Review, pp. 1, 9 (Mar. 4, 2015), available at http://etf.deutscheawm.com/ESP/SPA/Download/Research-USA/7793958c-2883-498c-8be8-95a3d7340480/US-ETF-Market-Monthly-Review.pdf.
 ETF Securities, ETPedia, Introduction to ETPs, p. 9, available at http://www.etfcanvas.com/pdf/ETPedia_ETF_Securities.pdf (last visited Apr. 9, 2015) (Source: Vanguard, Evolution of ETFs (November 2012)).
 This information was provided by the SEC’s Division of Investment Management; see also, Norm Champ, Director, Division of Investment Management, Remarks to the Practising Law Institute, Private Equity Forum (June 30, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370542253660 (“As I mentioned earlier, the alternative mutual fund market had over $300 billion in assets as of the end of May ”).
 See id. (“What are the reasons for this growth in the alternative mutual fund market? We are seeing a growing interest in the retail market for funds that offer distinctive investment returns.”).
 In these remarks, I use the term “structured notes” to refer mainly to structured notes sold to retail investors. I am also differentiating these products — which are SEC-registered securities sold to retail investors — from other structured securities that are typically sold in private offerings to institutional investors, including asset-backed securities, collateralized loan obligations, or collateralized debt obligations. In addition, the term “structured notes” as used in these remarks excludes exchange-traded notes (ETNs). The number reflecting the total value of the structured notes market comes from the Structured Retail Products (SRP) website (requires subscription), available at http://www.structuredretailproducts.com/americas (last visited Mar. 27, 2015) (data includes all retail issuances — “highly standardized structured products, usually issued in large numbers and on a regular basis” and “leveraged products,” which are “products that provide leverage long or leverage short position in an underlying, usually including a stop-loss feature.”)
 See Bloomberg Brief, Special Report: Structured Notes, 2014 Year in Review & 2015 Outlook, Sections on “U.S. Holders Table” and “Monthly Sales Trends,” available at http://newsletters.briefs.blpprofessional.com/document/tSCsIKFq114UUJmGDtMi.Q--_2lz13qwy33kz15fdy29/us-holders-table (last visited Apr. 2, 2015) (An estimated 99% of all purchasers of structured notes are retail investors; this estimate is based on aggregating the amounts of structured notes purchased by institutional holders over the past five years and extrapolating the annual amounts, and, based on this data, it is estimated that institutional holders represent approximately 1% of structured notes sold over the past several years); see also, SEC Investor Alerts and Bulletins, Investor Bulletin: Structured Notes (Jan. 12, 2015) (noting that “[f]inancial institutions typically design and issue structured notes, and broker-dealers sell them to individual investors”), available at http://www.sec.gov/oiea/investor-alerts-bulletins/ib_structurednotes.html; De-mos, Retirements at Risk from Widespread Abuse of High-Risk Derivatives, Finds New Study by Demos & The Nation Institute (May 17, 2011) (finding, among other things, that “brokerage firms improperly target the income-oriented elderly with high-commission products and intense sales pressure; and that these highly risky products are misleadingly labeled as ‘principal protected’ or marketed as being ‘safe and secure.’”), available at http://www.demos.org/press-release/retirements-risk-widespread-abuse-high-risk-derivatives-finds-new-study-demos-nation-i; Securities Litigation and Consulting Group, Structured Products In the Aftermath of Lehman Brothers (2009) (noting that “[s]tructured products have been issued by brokerage firms since the 1980s. Initially sold to institutional investors they increasingly found their way into retail investors accounts since 2006”), available at http://www.slcg.com/pdf/workingpapers/Structured%20Products%20in%20the%20Aftermath%20of%20Lehman%20Brothers.pdf ; Craig McCann, PhD, CFA and Dengpan Luo, PhD, CFA, Are Structured Products Suitable for Retail Investors?, Securities Litigation & Consulting Group (2006) (noting that “[o]nce sold only to sophisticated investors, structured products are increasingly being sold to unsophisticated retail investors.”), available at http://www.slcg.com/pdf/workingpapers/StructuredProducts.pdf . Some have said that many institutional investors do not buy these products because they can replicate the same investment exposures using standard products but with better terms. Bloomberg Brief, Eurinvest’s Michelet on Structured Notes Investing, Structured Notes newsletter (Dec. 23, 2010) (in an interview with Jean-Marc Michelet, CEO of Eurinvest Partners, he stated “High-net-worth individuals or institutions will never buy retail notes. The differences between what we buy and what are sold to retail are huge. For example, a retail client can get a capital guaranteed product which gives them 60 percent of any increase in the market. If we do the same, using a product with bond and a call, we would get 120 percent of the market increase, twice what the bank proposes to the client. The margins for us are much lower since the bank doesn’t have to pay lots of the people in-between.”).
 SEC Investor Alerts and Bulletins, Investor Bulletin: Structured Notes (Jan. 12, 2015), available at http://www.sec.gov/oiea/investor-alerts-bulletins/ib_structurednotes.html.
 See id. In 2014, the asset class breakdown in the United States for structured notes is the following: Equity (81.6%), Rates (9.0%), Commodity (3.5%), Reverse Convertible (2.4%), Rates/Equity (1.0%), and Other (2.4%). See Bloomberg Brief, Special Report: Structured Notes, 2014 Year in Review & 2015 Outlook, Section on “Asset Class Breakdown,” available at http://newsletters.briefs.blpprofessional.com/document/tSCsIKFq114UUJmGDtMi.Q--_2lz13qwy33kz15fdy29/us-holders-table (last visited Apr. 2, 2015).
 See John F. Wasik, De-mos, How Safe Are Your Savings?, p. 2 (2011), available at http://www.demos.org/sites/default/files/publications/How_Safe_Savings_Demos-Nation.pdf.
 See id.
 See id. at p. 1.
 Structured Retail Products (SRP) website (requires subscription), available at http://www.structuredretailproducts.com/americas (last visited Mar. 27, 2015).
 See John F. Wasik, De-mos, How Safe Are Your Savings?, p. 1 (2011), available at http://www.demos.org/sites/default/files/publications/How_Safe_Savings_Demos-Nation.pdf. Moreover, the risks posed by investment products to unwary retail investors have not escaped Congressional attention. For example, Section 917 of the Dodd-Frank Act required the Commission to conduct a study to identify the existing level of financial literacy and to focus on, among other things, identifying the most relevant information needed by retail investors to make informed financial decisions about investment products. See Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), Pub. L. 111-203, § 410 (2010) (“The Commission shall conduct a study to identify — (1) the existing level of financial literacy among retail investors, including subgroups of investors identified by the Commission…(3) the most useful and understandable relevant information that retail investors need to make informed financial decisions before engaging a financial intermediary or purchasing an investment product or service that is typically sold to retail investors, including shares of open-end companies, as that term is defined in section 5 of the Investment Company Act of 1940 (15 U.S.C. 80a — 5) that are registered under section 8 of that Act…”). The resulting SEC staff’s study, issued in 2012, identified several disclosure areas that needed to be improved, including timing, content, and format. See U.S. Securities and Exchange Commission, Study Regarding Financial Literacy Among Investors, p. xvii-xxi (Aug. 2012), available at http://www.sec.gov/news/studies/2012/917-financial-literacy-study-part1.pdf. While the study focused on investment products in general — such as mutual funds, exchange-traded funds, and other securities — the findings and suggestions are equally applicable to complex securities. See id. at p. 50-51, (Aug. 2012). In particular, the study recommended a number of suggestions for improving disclosure, including, among other things:
- First, that retail investors should have access to timely information about investment products;
- Second, that retail investors should receive summary documents containing key information about investment products, such as fees and expenses, investment performance, principal risks, and investment objective; and
- Third, that the disclosures provided should be written in clear, concise, and understandable language by making use of tables, charts, and graphs, where appropriate.
See id. at p. iv-v.
 See, e.g., Letter from U.S. Securities and Exchange Commission to Citigroup Funding Inc., 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/831001/000000000013009956/filename1.pdf; Letter from U.S. Securities and Exchange Commission to Credit Suisse AG, 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/29646/000000000013009959/filename1.pdf; Letter from U.S. Securities and Exchange Commission to JPMorgan Chase & Co., 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/19617/000000000013009966/filename1.pdf; Letter from U.S. Securities and Exchange Commission to Morgan Stanley, 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/895421/000000000013009967/filename1.pdf; Letter from U.S. Securities and Exchange Commission to Bank of America Corporation, 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/70858/000000000013009951/filename1.pdf; Letter from U.S. Securities and Exchange Commission to The Goldman Sachs Group, Inc., 424 Prospectuses relating to Registration Statement on Form S-3ASR (Feb. 21, 2013), available at http://www.sec.gov/Archives/edgar/data/886982/000000000013009963/filename1.pdf.
 See SEC Website, Division of Corporation Finance, Office of Capital Markets Trends, contact information, available at http://www.sec.gov/corpfin/Article/contact-us.html.
 In addition to the Division of Corporation Finance, the interdivisional efforts include the Division of Enforcement, Office of Compliance Inspections and Examinations, Division of Trading and Markets, Division of Investment Management, Division of Risk, Strategy, and Financial Innovation (now Division of Economic and Risk Analysis), and Office of Investor Education and Advocacy.
 As pointed out by a group of investor advocates, there are still many instances where investment risks and costs are not adequately disclosed, where disclosures are untimely or stale, and where issuers can improve the timing of disclosures by using technology to electronically deliver disclosures at the point of recommendation and not just at the point of sale. See Comment Letter from Barbara Roper (Director of Investor Protection, Consumer Federation of America), Lisa Donner (Executive Director, Americans for Financial Reform), Mercer Bullard (President and Founder, Fund Democracy), Linda Sherry (Director, National Priorities, Consumer Action), Bartlett Naylor (Financial Policy Advocate, Congress Watch, Public Citizen), Heather Slavkin Corzo (Director, Office of Investment, AFL-CIO), p. 5-6 (Mar. 10, 2015), available at https://common.money-media.com/php/image.php?id=269653&ext=.pdf&referrer_module=article.
 See id. at p. 5-7.
 Id. at p. 5; Comment Letter from Consumer Federation of America, p. 8 (Apr. 16, 2012), available at http://www.sec.gov/comments/4-645/4645-44.pdf. Structured notes offered to retail investors are typically securities registered with the SEC. See Bloomberg Brief, Special Report: Structured Notes, 2014 Year in Review & 2015 Outlook, “A Guide To Our Data” (stating that “U.S. notes are securities issued in the U.S. that are registered with the SEC”), available at http://newsletters.briefs.blpprofessional.com/document/tSCsIKFq114UUJmGDtMi.Q--_2lz13qwy33kz15fdy29/cover-page (last visited Apr. 3, 2015). Information on the terms of such notes can be found in SEC filings such as a prospectus, prospectus supplement, and preliminary pricing supplement. Offering documents for structured notes may also include terms sheets that supplement the descriptions of the terms of an investment in such notes. See, e.g., FirstAllied, Structured Product Client Disclosure Form (instructing prospective investors that “[i]t is important that before investing in these securities that you read the pricing supplement related to each Structured Product and the accompanying prospectus and prospectus supplement to understand the actual terms of the risks associated with the specific Structured Product that you are purchasing”),
available at http://www.firstallied.com/docs/default-source/default-document-library/structured-product-client-disclosure-form_istation.pdf?sfvrsn=0 (last visited April 3, 2015); see also JVB Financial website, Structured Products (noting that “[c]ertain securities discussed in this material are registered with the Securities Exchange Commission (the ‘SEC’) and the issuer of those products has filed a registration statement (including a prospectus, a prospectus supplement and a preliminary pricing supplement) with the SEC. All relevant offering documents including term sheets and prospectuses should be consulted prior to investing in these securities.”), available at http://www.jvbfinancial.com/services/trading/structured-products/ (last visited April 3, 2015).
For an example of the language that can be found in a pricing supplement for a structured note, see, e.g., Pricing Supplement to Prospectus for UBS AG $16,606,300 Trigger Return Optimization Securities Linked to the EURO STOXX 50® Index due March 29, 2018, available at http://www.sec.gov/Archives/edgar/data/1114446/000139340115000123/c405865_6901070-424b2.htm, in which the investment description says the following about the payout: “At maturity, UBS will pay an amount in cash that is based on the percentage and direction change in the level of the underlying index from the trade date to the final valuation date (the ‘underlying return’). If the underlying return is positive, UBS will repay your principal amount at maturity plus pay a return equal to the multiplier times the underlying return, up to the maximum gain of 46.48%. If the underlying return is zero or negative and the closing level of the underlying index on the final valuation date (the ‘final level’) is equal to or greater than the trigger level, UBS will repay the principal amount at maturity. However, if the underlying return is negative and the final level is less than the trigger level, UBS will repay less than the principal amount at maturity, if anything, resulting in a loss of your principal amount that is proportionate to the underlying return, and in extreme situations, you could lose all of your initial investment.”
See also, Final Term Sheet Supplementing Preliminary Pricing Supplement, Wells Fargo & Company 8% Equity Linked Securities due August 6, 2014, Linked to the Common Stock of Halliburton Company, available at http://www.sec.gov/Archives/edgar/data/72971/000119312513334925/d585137dfwp.htm. The payout performance formula from this term sheet states the following:
“Settlement Amount: The ‘settlement amount’ per security will equal:
- if the final determination price is greater than the upside participation threshold, (i) the $46.7326 original offering price plus (ii) the upside participation rate multiplied by the result of (a) the final determination price minus (b) the upside participation threshold;
- if the final determination price is greater than or equal to the principal return threshold and less than or equal to the upside participation threshold, the $46.7326 original offering price; or
- if the final determination price is less than the principal return threshold, the downside exchange ratio multiplied by the final determination price; provided, however, that the settlement amount shall not be less than $35.6258 (the ‘minimum repayment amount’).
If the final determination price is less than the principal return threshold (which is greater than the initial stock price and is equal to approximately 111.5% of the initial stock price), you will receive at maturity an amount of cash or a number of shares of underlying stock with a value less than the original offering price of your securities as of the determination date. You therefore may receive less than the original offering price of your securities at maturity even if the price of the underlying stock increases from the initial stock price.
Final Determination Price: The closing price of the underlying stock multiplied by the share amount, each as of the determination date.
Upside Participation Threshold: $53.2752, which is greater than the initial stock price and is equal to approximately 114.0% of the initial stock price.
Upside Participation Rate: 65%.
Principal Return Threshold: $52.1068, which is greater than the initial stock price but less than the upside participation threshold, and is equal to approximately 111.5% of the initial stock price.
Downside Exchange Ratio: 0.8969, which is equal to the initial stock price divided by the principal return threshold.
Initial Stock Price: $46.7326, which is based upon an intra-day price of the underlying stock on the pricing date.
Determination Date: August 1, 2014, subject to adjustment for non-trading days and market disruption events.”
See also, Joseph Halpern, Deconstructed Notes, Always Read the Fine Print on a Structured Note (Oct. 15, 2013), Exceed Insights (noting that when analyzing the above-referenced Wells Fargo & Company term sheet on its equity linked note, he found the calculation of the settlement amount “confusing”), available at http://exceedinvestments.com/always-read-the-fine-print-on-a-structured-note/ .
 Just last year, the Financial Industry Regulatory Authority (FINRA) brought several cases relating to non-traded real estate investment trusts; non-traditional exchange-traded funds (ETFs) such as leveraged ETFs, inverse ETFs, and inverse-leveraged ETFs; and other alternative investment products. See, e.g., FINRA News Release, FINRA Fines Berthel Fisher and Affiliate, Securities Management & Research, $775,000 for Supervisory Failures Related to Sales of Non-Traded REITS and Leveraged and Inverse ETFs (Feb. 24, 2014), available at http://www.finra.org/newsroom/2014/finra-fines-berthel-fisher-and-affiliate-securities-management-research-775000; FINRA News Release, FINRA Fines LPL Financial LLC $950,000 for Supervisory Failures Related to Sales of Alternative Investments (Mar. 24, 2014), available at http://www.finra.org/newsroom/2014/finra-fines-lpl-financial-llc-950000-supervisory-failures-related-sales-alternative; FINRA, Disciplinary and Other FINRA Actions, p. 18 (Feb. 2014), available at http://www.finra.org/sites/default/files/DisciplinaryAction/p446063.pdf (discussion on action against PNC Investments LLC). FINRA has also brought actions specific to structured notes. See, e.g., FINRA News Release, FINRA Fines Santander Securities $2 Million for Deficiencies in Its Structured Product Business and Unsuitable Reverse Convertible Sales (Apr. 12, 2011), available at http://www.finra.org/newsroom/2011/finra-fines-santander-securities-2-million-deficiencies-its-structured-product; FINRA News Release, FINRA Fines H&R Block Financial Advisors $200,000 for Inadequate Supervision of Reverse Convertible Notes Sales, Suspends and Fines Broker for Unsuitable Sales to Retired Couple (Feb. 16, 2010), available at http://www.finra.org/newsroom/2010/finra-fines-hr-block-financial-advisors-200000-inadequate-supervision-reverse.
In addition, state securities regulators also have experience bringing cases involving the sale of complex products. See, e.g., In the matter of LPL Financial, LLC — Non Traded REITS (Consent Order E-2012-0036) (Massachusetts Securities Division) (Feb. 6, 2013) (involving the sale of non-traded REITs sold by LPL), available at http://www.sec.state.ma.us/sct/current/sctlpl/LPL%202012-0036%20Consent%20Order.pdf; In the matter of RBC Capital Markets, LLC & Michael D. Zukowski (Consent Order E-2009-0059) (Massachusetts Securities Division) (July 20, 2011) (involving the sale of leveraged ETFs and leveraged inverse ETFs), available at http://www.sec.state.ma.us/sct/archived/sctrbc/rcb__complaint.pdf.
 See Commissioner Luis A. Aguilar, Empowering the Markets Watchdog to Effect Real Results (Jan. 10, 2009), available at http://www.sec.gov/news/speech/2009/spch011009laa.htm.
 See Amendments to Regulation A, SEC Release No. 33-9741 (Mar. 25, 2015), available at http://www.sec.gov/rules/final/2015/33-9741.pdf (hereinafter “Regulation A-plus Adopting Release”).
 See Section 401 of the JOBS Act; see also Commissioner Luis A. Aguilar, Helping Small Businesses and Protecting Investors (Mar. 25, 2015), available at http://www.sec.gov/news/statement/helping-small-businesses-and-protecting-investors.html.
 The Regulation A-plus Adopting Release also provides that the Commission staff will undertake a broad study and submit a report to the Commission within five years on the impact of Regulation A-plus offerings on capital formation and investor protection. Critically, the report will include a review of, among other things, the number of enforcement actions taken against issuers, placement agents, or brokers with respect to both Tier 1 and Tier 2 offerings, and whether any additional investor protections are necessary for either Tier 1 or Tier 2. Moreover, based on the information contained in the report, the Commission may propose to either decrease or increase the offering limit for Tier 1. See Regulation A-plus Adopting Release at Section II.A. (Final Rules and Amendments to Regulation A. Overview).
 See Regulation A Adopting Release at Section II.C.2.c. (Non-public submission of Draft Offering Statements).
 It is possible, however, that a state’s notice filing requirements may reduce the time period in which an offering statement and related materials are on file with the state before Commission qualification. See Regulation A Adopting Release at Section II.C.2.c. (Non-public submission of Draft Offering Statements).
 See Regulation A-plus Adopting Release at Section II.H.3.d. (Application of State Securities Law in Tier 1 and Tier 2 Offerings), fn. 832.
 See Comment Letter from NASAA (Feb. 19, 2014) (stating that “[s]tate regulators have particular strengths that uniquely qualify them to effectively oversee Regulation A+ offerings. Because we are geographically close and accessible to both investors and local businesses, we are often in a better position than the Commission to communicate with them about the offering to prevent abuse and improve the overall quality of the deal for investor and business alike. Our proximity to investors also puts us in the best position to deal aggressively with securities law violations when they do occur.”), available at http://www.sec.gov/comments/s7-11-13/s71113-12.pdf.
 The effective date of the Regulation A-plus amendments is 60 days from publication in the Federal Register. See Regulation A-plus Adopting Release.