Finra rejects ‘more than half’ of structured product adverts

A Financial Industry Regulatory Authority official has publicly commented for the first time on the structured product marketing materials used by brokers, singling out mass emails to retail investors as a particular concern

Financial Industry Regulatory Authority headquarters

Financial Industry Regulatory Authority (Finra) staff warned brokers in more than 50% of cases not to use sales materials related to structured products that failed to comply with new communications rules, said Thomas Selman, executive vice-president for regulatory policy at Finra, speaking at a conference last week.

More than half of sales materials related to structured products have earned a "do not use" warning from Finra staff in the past 14 months, while 75% merited comments for perceived deficiencies under the new rules, Selman told the Structured Products Americas conference in Miami on May 8.

It is the first time a Finra official has spoken publicly about the structured product marketing materials submitted by brokers since Rule 2210 came into effect last February, requiring sellers to file the materials with Finra within 10 days of first use.

Selman said Finra has commented on a "far greater" number of structured product marketing materials than on any other category of financial product. In comparison, 15–20% of mutual fund materials received comments, according to Selman.

The regulator is also concerned that brokers are misleading investors with the information they provide in marketing materials for exchange-traded notes (ETNs) that relates to the historical performance of the products, he said.

There is no way that I or anybody else with an average understanding of financial products can understand how these things work or their risks from reading one of these emails

Selman said the "most worrisome" materials from a regulatory perspective are "blast emails", or mass electronic mailings used by broker-dealers to advertise products. The emails Selman has seen contain "a few very sketchy" descriptions of the products and are unlikely to provide a fulsome picture to the retail audience at which they are aimed, he added.

Finra rules require that marketing material be tailored to a particular audience and provide enough information to ensure that the intended audience can understand the product. "There is no way that I or anybody else with an average understanding of financial products can understand how these things work or their risks from reading one of these emails," he said.

In advertising for ETNs, dealers may be misstating the relationship between the performance of an ETN and the asset it is designed to track, said Selman. While the products avoid tracking error by promising to pay out the performance of an underlying index, the value of an ETN may be different from the level of its underlying asset because of fees or spreads. Finra encourages brokers to include market values as well as intrinsic values in their marketing materials, he said.

The outcome of a Finra review can range from the regulator issuing no comments to asking brokers to refrain from using a particular marketing document. "Typically, what we would say in a 'do not use' letter is that you may not use it for the following reasons," said Selman. Brokers would then have to change the material in order to continue to use it for marketing purposes.

Jim Schaberg, managing director at Incapital in Chicago, who was speaking on the same panel, said Incapital uses blast emails to reach institutional investors only, but added that it needs to "take another look" to ensure that dealers are not forwarding these emails on to retail investors.

Rule 2210, one of the so-called "communications rules", required brokers for the first time to file with Finra all retail communications "concerning any security that is registered under the Securities Act of 1933 and that is derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency".

The regulator recently extended until May 23 a deadline for market participants to provide feedback on the new rules.