SPA Conference: Attorney highlights 1940 Act compliance for mutual fund-linked products

By LLuvia Mares

New York, Oct. 17 - Banks putting together structured products based on mutual funds need to pay close attention to compliance with the 1940 Act that regulates those funds, according to attorney Stuart Fross, partner in WilmerHale's securities department.

Successfully completing the process can prevent excessive leverage, a major concern when dealing with structured products linked to mutual funds, Fross told the third annual Structured Products Association Summit held in New York on Wednesday.

"The structured product is going to be pretty appealing because you are going to get a prospectus," he said. "The prospectus is non-negotiable, it is what it is, so now your due diligence environment will change dramatically."

Fross said issuers need to evaluate "unformed" risks by looking at the investment company's tax status.

Some investment risks to watch out for are due diligence, cost benefit versus physical, counterparty risk analysis, research notes and complying with the client's guidance, according to Fross.

"Investment decisions are not enough," he said. "You need to look at the right strategy, right product and the back office must be ready for it."

He said at the conference the back office should be ready to look at valuation, pricing, settlement and liquidity risks.

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