The NASD caught dealers off guard last week when it issued a guidance notice to members suggesting structured products should only be sold to investors eligible to trade options.
The U.S. structured products market has struggled to become the cash cow it is to firms in Asia and Europe, and this has been attributed to the regulatory regime. "This is a setback," said Anna Pinedo, partner with law firm Morrison & Foerster in New York, referring to the NASD move.
The guidance, while not a regulation, will likely be something the agency will comment on when inspecting broker dealers' authorizations, said lawyers, and it will expect firms to follow the note.
Pinedo has fielded calls all week from dealers concerned by the notice. Much of the guidance was in line with previous statements on market best practice but Section 2, which suggests only accounts eligible to trade options should be sold principal-at-risk structured products, came as a shock. "The NASD had not suggested it was going to do anything in this area," she added. There had been some hope the Securities and Exchange Commission was beginning to extend approval of structured products (DW, 6/10). Gary Goldsholle, associate general counsel at the NASD responsible for the note, said it has not yet received any specific inquiries or comments relating to section 2 of the guidance note.
Structured investment products are being sold to investors who, under this latest guidance, it seems should not be buying them. A senior sales official at a firm which is marketing this type of product said the guidance was trobling because if followed to the line it would exclude a significant chunk of potential investors from buying the products.
Several lawyers are looking to make comments to the NASD in response to the guidance, but they noted because it is not a regulation there is no formal comment process. It could not be determined by press time if the International Swaps and Derivatives Association would make any comment on the guidance.
