Trade associations publish guidelines for managing distribution of structured products to investors

By Kenneth Lim

Boston, July 9 - A group of five trade associations on Wednesday released a set of non-binding principles for the distribution of structured products to retail investors.

In a joint letter titled "Structured Products: Principles for Managing the Distributor-Individual Investor Relationship," the Joint Associations Committee outlined 12 principles meant to guide distributors when they actively market or recommend products to individual investors.

The Joint Associations Committee comprises members from the European Securitisation Forum, the International Capital Markets Association, the London Investment Banking Association, the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association.

Transparency is key

The principles stress product transparency and clarity so that investors can "evaluate the investment from a risk/reward perspective," the letter said. Distributors should also help investors to fully understand the risks involved in the investment.

Fees and costs should be clearly communicated, and distributors should have internal processes and controls to consider the appropriateness of fees and other incentives, the letter stated. Internal controls should also be in place to manage potential conflicts of interest.

Credit ratings of issuers or guarantors may not represent a rating of the potential investment performance of a product, the letter noted. But distributors should take into account how ratings affect the terms of a product and explain the significance of ratings.

Distributors should also have their own processes to determine whether a product is "new" and to actively assess whether a product is appropriate for clients, the letter stated. Sales of products to individual investors should also be subject to oversight and compliance controls.

The letter urged distributors to educate investors about the nature of any secondary market in the products, even if there is little chance of a sale prior to maturity, and valuations should be maintained and communicated regularly to investors. Investors should also be encouraged to discuss tax implications with professionals.

Distributors should provide financial advisers with the necessary training in structured products. The letter also encouraged providing financial advisers with the necessary information to monitor the performance of structured investments.

'Long time in the making'

"The second set of JAC Principles represents many months of thorough member discussion and wider syndication, and articulates the values that market participants share as they promote the continued development of a healthy market in retail structured products," the committee's chairman, Timothy Hailes, said in a statement. "As with the July 2007 Provider-Distributor Principles, the key will be intelligent and proportionate application to local regimes."

Hailes is managing director and associate general counsel at JPMorgan Chase in London.

The principles are intended to complement the committee's "Principles for Managing the Provider-Distributor Relationship" released in July 2007.

Structured Products Association chairman Keith Styrcula welcomed the principles.

"Obviously we're big supporters of the effort of the joint group and we think they've been very respectful of the Structured Products Association and some of our advisory boards, so we're very pleased with the end result."

"It's been a long time in the making," Styrcula added. "It provides a cohesive framework for people to start thinking about the relationship between the product issuer, the product distributor and the investor."

He stressed that the principles are "guidelines, not meant to be any kind of one-size-fits-all procedures," and individual distributors should apply them as suitable.

The Structured Products Association provided feedback in the early stages of forming the principles, Styrcula said. His concern was that the principles had to take into account the different regulatory environments for structured products in the United States, Europe and Asia.

"Our comments were originally that ... the U.S. is a very different regulatory scheme compared to Europe or Asia," he said. "There are a dozen regulatory agencies here that are looking at structured products, so we are highly regulated compared to other jurisdictions and other products. ... Our initial observation was that the procedures were focused primarily on a European kind of system."

But those concerns have been addressed in the final draft, and the result is "outstanding," Styrcula said.

"What was important was that U.S. retail distributors had an opportunity to weigh in," he said.

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