CHICAGO — Wall Street’s eagerness to develop and sell exotic new products to the nation’s growing ranks of retirees is worrying regulators.
A number of top regulatory officials laid out their concerns here during a panel discussion at NASD’s spring compliance conference last month.
Joining NASD officials on the panel were Susan Merrill and Grace Vogel, two regulatory executives from the
New York Stock Exchange Inc.
Ms. Merrill and Ms. Vogel will become head of enforcement and head of the department of risk oversight and operational regulation, respectively, of the new organization that will be formed from the
consolidation of the regulatory units of the NYSE and NASD of Washington.
When officials were asked what one risk keeps them awake at night, James Shorris, current NASD enforcement chief, said he worries about the “impact of this huge transition” of money from inheritances and retirement plans into individual accounts.
“The size of [these assets] can create huge temptations for folks [in the industry],” he said.
The “demographic shift has become absolutely critical” for regulators, said Elisse Walter, NASD senior executive vice president of regulatory policy.
“That, combined with less of a safety net” from pension plans and
Social Security, puts the onus on regulators to protect the investing public, she said.
Those same concerns were echoed in a speech at the conference by Doug Shulman, NASD vice chairman. He warned about the “coming tidal wave of baby boomer retirees” who may be sold “a new generation of packaged products” to meet their income needs.
But regulators are worried that investors won’t understand what they are getting with these new, more complicated products.
“Prospectuses are not being read,” Ms. Merrill said, and explanations clients receive from their brokers aren’t always detailed.
Although NASD has not yet seen an increase in the number of complaints about one type of exotic security — structured products — Dan Sidebars, NASD executive vice president of member regulation, said that firms should be on the lookout for problems.
Structured products, a huge area of growth for Wall Street, are derivatives-based investments that meet specific objectives. The most popular types offer a current yield, downside protection and some upside, based on the movement in an index or stock.
Complaints about structured products tend to be about communications and suitability, Mr. Sidebars said.“Sales forces have not been trained well enough” in structured products, he said.
Ms. Vogel said that variable annuities and indexed certificates of de-posit also are generating complaints. “Registered reps may not understand what they’re selling,” she said.
Marc Menchel, general counsel of NASD’s regulatory-policy area, said that increased competitive pressures have caused firms to put more emphasis on proprietary trading, which has created a “tremendous systemic risk in the system.”
Ms. Vogel said she is worried about concentration of that risk, which could cause a crisis similar to the near-collapse in 1998 of Long-Term Capital Management LP, a Greenwich, Conn.-based
hedge fund. She said that firms may be overly reliant on risk models and warned: “We now have [brokerage] firms that are too big to fail.”
