The promotional communication of structured products to the retail audience is a key concern and crucial topic for the industry, according to participants of the Marketing & Advertising of Structured Products panel discussion at SRP's sixth annual Americas Wealth Management & Derivatives conference in Boston on June 15.

Richard Jory, global head of content, SRP, opened the discussion with a summary of a Credit Suisse International (CSI) case in the UK in which the Swiss bank was found to have failed to ensure financial promotions for CSI's Cliquet Product, a capital-protected structured deposit, were clear, fair and not misleading. A total of GBP797m (US$1,014m) of the product was distributed to over 83,000 customers via the Yorkshire Building Society on an unadvised basis. The probability of achieving only the minimum return was 40-50% and the probability of achieving the maximum return was close to 0%, according to the FCA at the time.

"The unclear wording, and having the maximum return presented as one of four potential outcomes, where the probability of it materialising was very little, as well as unclear early exit fees" are a clear example of what some of the bad things that "hopefully, used to happen" in the industry, Jory said. The FCA went on to fine CSI GBP2.4m, and the Yorkshire Building Society GBP1.4m.

Customers fully understanding and appreciating the products, their underlyings and all the key interactions, is a core concern of regulators and one that drives regulation in promotional communication, said David Roscum (pictured), manager, Advertising Regulation, Finra. "Understanding liquidity, valuations, the impact that reference assets have upon products, and the behaviour of the product under unforeseen market conditions are all on regulators' radar," Roscum said. "A lack of understanding would lead to inappropriate recommendations and sales, and it is something we look very closely at."

Roscum outlined three primary tests that any retail communication must pass in order to be approved by Finra for release: whether the communication is targeted at a retail audience (more than 25 retail customers in a 30 day period); whether the security being advertised falls under the Securities Act; and does the security derive its value from an underlying asset. If all three are met, the communication must be filed with Finra's advertising regulation department, Roscum noted, adding that this concerns only specific tranches and not generic explanations of how a certain type of product works in general.

"In the first year since coming in force in February 2013, we received 750 communications filings on behalf of structured products companies under this rule, and over 90% of those required significant revision to meet our requirements," he pointed out, adding that 2016 had seen 130 filings, of which 33% required revisions. "In comparison, the department reviews over 100,000 filings in total per year, with just 12% of that total requiring amendment. There is a big difference between these revision rates, and that is a significant concern for us."

It's important for issuers to take a step back with regard to retail communication, and realise that the lowest common denominator might not be very sophisticated, Roscum advised. "I doubt that most of the retail audience have even heard of a structured products, let alone understand its intricacies."

There are two broad primary concerns that Finra's advertising regulation department has, and those are whether the communication omits any material information, and whether it oversells certain aspects or features. Risks must be particularly well articulated, and risk disclosures in a prospectus or pricing supplements "do not cure an otherwise defective marketing document; that one must be able to stand on its own, providing all the key information".

There are also certain things that communication should not do, like oversell the liquidity of a product. "The message needs to be fair and balanced," Roscum said, adding that complete fees disclosure is crucial.

"In 2016 we took disciplinary action against Merrill Lynch for failing to fully disclose certain fixed costs associated with structured notes linked to the Investable Volatility Index, where a 6% annual charge linked to the index calculation was not properly disclosed," he said, noting that the bank was fined $5m by Finra and $10m by the SEC.

Chris Schell, Partner, Davis, Polk & Wardwell, asked whether the advent of digital distribution, pointing to an earlier presentation on algorithm-based theme investing, is something Finra is looking into.

"It doesn't matter how the material is delivered - we apply the same standards to any communication that reaches the retail audience," Roscum said. "As for the actual black box algorithms, we do not dig too deep into those by default, leaving enough leeway for companies to innovate and generate value," he added, noting that algorithms are still subject to regulation and could be desisted in case of miscalculations or misappropriation of assets.

Schell also pointed out that having a summary of a product laid out on juts a couple of pages invariably involves judgement by the issuers on what's important, and how to convey that, referencing the upcoming Key information documents (Kids) in Europe, asking if a short summary document can work fine.

"The core consideration is whether the communication on its own, even as little as one page, is a fair and balanced representation," Roscum replied, noting that Finra has approved two-page documents, and is ok with the notion of summary prospectuses.

Hardeep Walia, founder and managing director of US fintech firm Motif Capital, asked during the Q&A at the end of the discussion whether Finra is looking at mandating such product summaries on structured products, and whether it is possible to have a self-directed market where advisors' guidance is not needed in view of products' complexity.

"It is in the realm of possibility, of course, but the current situation is that less and less material is being pushed out, as seen in our numbers for 2016, as issuers realise that complex products warrant so many questions from investors that they can hardly often rely on documents alone," Roscum said. "With respect to mandating summary disclosures, this is not on our horizon at all, but as I said, we have approved and will approve fair and balanced messages, no matter the length."

Schell added that an SEC survey had found that summary documents, unsurprisingly, indeed provide a much easier and better understanding of products by retail investors. "When we talked with them on whether they would mandate this, SEC said it does not have the authority to do this, but also it wouldn't object to such summaries either."

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