SEC Questions Sale of Complex Securities to Retail Investors

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Commissioner Luis Aguilar told a securities conference that the Securities and Exchange Commission will bring more enforcement actions against companies selling complex securities and structured products, including equity-indexed annuities, leveraged and inverse ETFs, reverse convertibles, alternative mutual funds and structured notes, to less sophisticated retail investors.

Following the financial crisis, the SEC created the Complex Financial Instruments Unit to investigate big banks misleading sophisticated investors with collateralized debt obligations and other structured products. The unit is now addressing more cases on inappropriate products with insufficient disclosures sold to mom-and-pop investors.

Aguilar said that the SEC expects more enforcement actions in this area. The Commission is also going to take an enhanced look at new structured products submitted by registrants to offer to retail investors.

The talk highlighted structured notes as one area that has become popular and targets retail investors. According to the data, 99% of purchasers in the $45 billion market are retail investors. A recent Investor Bulletin from the Commission pointed out that the complexity of the payoff structures, opaque pricing, high fees, illiquidity and other risks makes it difficult to believe that investors who are not highly trained financial professionals can understand them with the current disclosures.

From the prepared remarks, it seems that we can expect most of the enforcement actions to be centered around inadequate disclosures to investors.

If you have information about a bank, broker or other financial professional targeting investors with inappropriate products for their risk tolerances and level of education, please contact us. Our whistleblower attorneys will review your evidence for a potential submission to the SEC whistleblower program.

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