SEC Uncovers Widespread Suitability Violations in Structured Product Sales 

The SEC’s Office of Compliance Inspections and Examinations (OCIE) has issued a Risk Alert warning firms to enhance and enforce suitability policies and procedures for the sales of structured products.  Following a review of 10 BD branch offices, the OCIE staff found a wide range of suitability violations including an overconcentration of sales to customers who were non-English speaking, elderly or had a conservative investment objective.  OCIE also found a high level of liquidations below face value.  OCIE cited failures to review reps’ suitability determinations and undocumented branch manager overrides.  According to OCIE, the Risk Alert “is intended to raise awareness of these types of weaknesses in order for registrants to consider them in their own compliance programs.”

OUR TAKE: Firms should ask whether they should ever sell structured notes to retail investors.  If they do, they need to significantly increase rep supervision, testing, and ongoing monitoring.

http://www.sec.gov/about/offices/ocie/risk-alert-bd-controls-structured-securities-products.pdf