Outlook 2014: Fiduciary standard, conflicts of interest will keep regulators busy

By Emma Trincal

New York, Dec. 31 - "We expect 2014 to be an interesting year for regulatory and compliance in the structured products space. It seems like every year brings up so many issues, some of which are not always expected. We think 2014 will be no exception," said Anna Pinedo, partner at Morrison & Foerster.

She offered a few key points that she said issuers should pay close attention to.

"A concern for broker-dealers is the SEC's finalization of the new fiduciary duty rules," she said.

Fiduciary standard

Currently, most structured products are underwritten by issuer-affiliated broker-dealers. One possible consequence of the final rules would be the imposition of a requirement that issuers obtain consent from clients to buy securities issued by their affiliates. Underwriters may also turn to other issuing credits, some lawyers say.

Getting consent from clients is not difficult in itself, but some see the requirement as more costly and burdensome.

The Financial Industry Regulatory Authority has expressed concerns over certain aspects of the structured products issuance and sales business over the past few years, publishing regulatory notices on a variety of issues, including suitability and complexity. This trend is likely to continue.

Conflicts of interest

"In this coming year, the SEC and Finra will remain focused on structured products. One highlight is the close attention regulators will pay to matters of conflicts of interest, as Finra emphasized in its October report," Pinedo said.

In this report, Finra underlined conflicts with proprietary indexes.

Other potential conflicts to be addressed this year will include how issuers pay their distributors, according to the report. Finra will look into possible conflicts of interest whenever a distribution channel has an incentive to sell the securities of an issuer versus those of another.

Basel III

"Finally, Basel III continues to be closely watched by banks and is not without consequences for structured products issuers regulated by it," Pinedo said.

The rules became final in July, and the banking agencies in the United States proposed a new liquidity coverage ratio in October.

Transparency

Another important topic will be transparency. Regulators in the structured products industry often emphasize the need to introduce more transparency in the secondary market. The year 2014 may see this expectation better fulfilled thanks to a large U.S. exchange.

In October, at a conference in New York sponsored by the Structured Products Association, Nasdaq announced that it will support the listing of U.S. structured products on its Mutual Fund Quotation Service, which is already used by nearly all mutual funds.

This development is likely to be a big theme for the coming year, lawyers and issuers said during the conference.

"We anticipate that the pricing of these products in MFQS will greatly enhance transparency for issuers and millions of investors around the world," said Jeff Kimsey, vice president, Nasdaq OMX Global Information Services.

"We are not able to speak on behalf of regulators, but we think this initiative will help investors better understand pricing for structured products."

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