The US Securities and Exchange Commission (SEC) Office of Investor Education and Advocacy has issued an investor bulletin to educate investors about the features and potential risks of structured notes.
The new bulletin demonstrate the SEC’s continued focus on investor education and promoting awareness about all the tools at their disposal to help make an informed investment decision. “There has been a very common theme over the past few years of making sure that investor education has been done well so that the investor understands the product and its benefits and its risks,” said said Chris Schell, partner at Davis Polk & Wardwell. “I think this is just a further attempt by the SEC to make sure that investors have the tools at their fingertips to make sure that they understand these products.”
The bulletin, which was published on January 12, spells out the risks of investing in structured notes along with other considerations including complexity, market risk, issuance price and note value, liquidity, payoff structure, credit risk, call risk and tax considerations.
The bulletin consolidates topics that the SEC has spoken about publicly either in conferences or in written guidelines. “It does not raise in my mind any issues that well advised issuers would not have already considered and implemented into their documentation,” .
The second part of the bulletin includes a suitability test with a number of questions that investors should ask before investing in structured notes. Investors are encouraged to do their research to have an understanding of all the risks involved in investing in these products.
“The SEC bulletin is consistent with much of the language in free-writing prospectuses and is, accordingly, a good stand-alone summary to supplement the risk disclosure most issuers currently provide to investors,” said Keith Styrcula, chairman of the Structured Products Association.
The bulletin is principally addressed at retail investors, advising them to carefully consider the information that issuers are already disclosing based on the SEC rules and guidance. “The SEC is still carefully following this product area, and is encouraging investors to take advantage of the information that issuers are disclosing, and to use that information in making an investment decision,” said Lloyd Harmetz, partner at Morrison & Foerster.
Click here to read the full investor bulletin.
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