Sales practices for structured products debated

IRVINE, Calif. — A debate is brewing over the establishment of retail-sales-practice guidelines for structured products. At issue is how much product manufacturers should be on the hook for unsuitable products. In proposed guidelines released in April, a group of international trade associations said that suitability “is exclusively an issue for distributors” and that retail firms must “take responsibility for the accuracy and the compliance” of information given to them by manufacturers. But that approach won’t work in the United States, the New York-based Structured Products Association said in a comment letter this month. The SPA represents U.S. issuers and distributors. Unlike in Europe, U.S. issuers are primarily liable for material-disclosure omissions, the SPA said, and that liability cannot be delegated to a distributor. Issuers must file disclosures that “highlight all the risks,” it said. In fact, issuers often reserve the right to review and approve sales materials, the association wrote. The April guidelines were proposed by the Securities Industry and Financial Markets Association of New York and Washington, the European Securitisation Forum of London, the International Capital Market Association of Zurich, Switzerland, the International Swaps and Derivatives Association Inc. of New York and the London Investment Banking Association. The trade groups finished taking comment on the guidelines Friday. The guidelines are “European-centric,” said Anna Pinedo, a New York-based partner at Morrison & Foerster LLP of San Francisco, author of the SPA’s letter. The SPA suggested that the groups revise the proposed standards to be applicable more generally. Firms are “not going to want to conduct business completely differently in Europe and the U.S.,” Ms. Pinedo said in an interview. Dividing the liability between issuer and distributor is not yet a big issue in the United States, because most retail sales of structured products are done by the same firms that create them. But that could change as more firms adopt an “open architecture” structure and bring in deals from competitors, observers say. The trade groups’ guidelines were in response to a September 2006 discussion paper from the United Kingdom’s Financial Services Authority on the fair treatment of customers in general. The FSA, the U.K.’s regulator, said in its paper that the primary responsibility of a product provider or manufacturer is to ensure that products are “soundly designed for the target market” and sold “with clear, understandable information (for distributors and, where relevant, customers).” Some never suitable The SPA warned in its letter that “some structured products may never be suitable for certain retail clients” and simply shouldn’t be offered. “Issuing firms have a responsibility not to issue products that are so complicated and [have such a high] degree of risk that the product is unsuitable for retail investors per se,” Keith Styrcula, SPA chairman, said in an interview. “Issuers cannot just wash their hands of” such risky products, he said. Mr. Styrcula said that these types of deals are rare and that 90% or more of the U.S. market for structured products is made up of fairly mundane yield-oriented products and enhanced indexes. The trade groups also floated the idea of a “know your distributor” approval process for manufacturers. At a minimum, the SPA said, such a process would ensure that retail firms understood the products, had disclosed their typical client base and had training programs in place. Separately, the SPA is working with JPMorgan Chase & Co. of New York and other issuers to standardize the names of product types. Mr. Styrcula said that most firms use their own trade names but that investors and brokers would better understand the market if the same generic terms were used for each type of product.