SEC staff found common weaknesses and supervisory deficiencies at broker-dealers selling structured securities products to retail customers.  The findings are based on a 2009 sweep examination of 11 broker-dealers - a cross-section of the industry that engages in this business - which is all documented in the Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors.  

Structured securities products ... generally do not represent ownership of a particular asset, as does stock in a manufacturing company; instead, the products promise returns to investors based on the performance of one or more underlying assets.

Common Weaknesses, Supervisory Deficiencies Found.   The staff identified common weaknesses seen in sales of structured securities products and describes measures by broker-dealers to better protect retail investors from fraud and abusive sales practices.   Among other things, the staff observed that broker-dealers might have:

• recommended unsuitable structured securities products to retail investors;
• traded at prices disadvantageous to retail investors;
• omitted material facts about structured securities products offered to retail investors;
• engaged in questionable sales practices with customers.

They also observed potential supervisory deficienciesm which the SEC attributed to a lack of training requirements for supervisors and registered reps. 

“Sales of structured products to retail investors have increased over recent years and ... this report could help companies strengthen their compliance programs ..."  -- Carlo di Florio, Director of SEC’s OCIE.

He added, “Beyond this report, we are monitoring the way in which these products evolve, and are considering additional steps in the near future relating to structured securities products that may further bolster investor protection.”

Reported Recommendations.   To improve surveillance of sales practices and enhance training for sales and supervisory personnel, the staff reports that larger B/D's should focus on issues such as:

• having adequate procedures and controls to prevent and detect possible abuses in the secondary market for structured securities products ("SSP's");
• disclosing material facts re: the SSP's being offered;
• requiring RR's and their supervisors to complete specialized training in SSP's before selling these products to customers;
• accurately listing SSP's on customer statements;
• having controls to independently review their desk prices of SSP's in the secondary market;
• having controls to adequately review the suitability of these products for customers; and
• having controls to review customer concentrations in the SSP's it sold.

Smaller retail broker-dealers should focus on:

• suitability of SSP's recommended to retail customers;
• establishing, maintaining and enforcing proper supervisory procedures relating to suitability determination for purchasers of SSP's;  and
• having adequate training for RR's who sell SSP's and for their supervisors.

SEC OCIE Staff Credits (New York and Chicago).   Examinations conducted by:  NYRO - John Nee, Rosanne Smith, Linda Lettieri, Sonam Varghese, Lourdes Caballes, Ethan Allfree, Ellen Hersh, Jennifer Fournier, Susan Castillo, Kathleen Kuzmen, Dee-Ann DiSalvo, Christy Wolanski, Tamara Heller, Sarah Curran, Savitri Singh.

ChiRO - Thomas Murphy, Daniel Gregus, James Malo, Marianne Neidhart, Joshua Herbst, Stephen Vilim, John Haworth, Edward Holland, Ambar Freyre, David Kinsella, Christopher Caprio, Anna Mieszaniec, Thomas Conroy, John Brodersen.

To access the press release, go to:   [SEC PR 11-157, 7/27/11]