SEC Finds Shady Practices in BDs' Structured Product Sales

Cipperman Compliance Services notes that "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."

The SEC found during its exams of one BD branch that its reps were "aggressively recommending" SSPs to customers while appearing to "mischaracterize the underlying attributes of the products in light of the goals of the investors, particularly to non-English speaking investors."

Another exam found significant SSP activity in the accounts of elderly customers at two BDs, and in the accounts of customers for whom the firm did not have any age information.

"Data from one of these firms revealed that the firm often did not collect, and therefore representatives could not consider, information about customers' age when making suitability determinations," the SEC states.

The agency notes that while "the absence of certain customer specific factors, such as age, does not necessarily render a transaction unsuitable, together with other factors, such lack of consideration may warrant further inquiry." The SEC's analysis identified, on an aggregate basis, the predominant types of customers that had purchased SSPs at each firm and branch office, and it allowed the OCIE staff to further scrutinize branch offices and reps that had made high numbers of sales that merited further review.

Another review of all SSP trading at four branch offices of one firm revealed that the firm sold more SSPs to customers in its most conservative investment objective ("income") than it did to customers in its most aggressive investment objective ("speculation"): approximately $96 million versus $11 million.

"While such observations did not necessarily indicate that there were unsuitable transactions, the staff used this high-level information to identify and request further information from those branches and representatives that had conducted the highest numbers of such sales," the SEC said.

For instance, upon further review of "documentation" and emails, the SEC found that reps at one firm had retroactively changed customers' investment objectives in their account documentation, without the customers' approval, in order to justify concentrated positions of SSPs in the portfolios.