Bloomberg News

State Regulators in U.S. Examine Structured Note Sales

June 28, 2012

A group of U.S. state securities regulators is seeking information on the sales practices of 10 structured-note issuers after a similar request from the Securities and Exchange Commission.

The regulators sent letters to the issuers in March and April, said Ronak Patel, co-head of the group for the North American Securities Administrators Association. Patel, who is also deputy securities commissioner of Texas, declined to elaborate since it is the policy of some states not to confirm or deny ongoing investigations, he said.

The U.S. structured-note industry, which sells bank bonds bundled with derivatives for customized bets, has come under scrutiny from regulators for the securities’ complexity and lack of transparency. Some notes have higher fees than their potential returns. Banks have sold $19.8 billion of SEC- registered securities this year and $45.9 billion in 2011, down from a record $49.5 billion a year earlier, according to data compiled by Bloomberg.

The SEC asked banks that issue the securities to boost disclosures to investors in April, including the banks’ own estimates for the securities’ market value at the time of sale. The regulator sought the changes in a letter to banks it didn’t identify that was posted on its website April 13. The agency also asked the issuers to explain how they set up a secondary market for the notes, how they use the proceeds raised from sales and how important the business is to their funding needs.

States Investigations

Some individual states have started investigations. Florida, Massachusetts and Georgia opened examinations of the products last year. In June 2011, Georgia subpoenaed UBS AG, Morgan Stanley and Ameriprise Financial Inc. in its probe over whether the firms broke the state’s securities laws in selling structured notes called reverse convertibles. The securities are short-term bonds generally sold to individuals that convert into stock if a company’s share price plummets.

The Financial Industry Regulatory Authority issued a notice in January to guide firms about the supervision of sales of “complex products,” citing some structured notes as examples.

Derivatives are contracts whose value is derived from stocks, bonds, currencies and commodities.


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