Recently the SEC sent out a letter to certain financial institutions regarding their offerings of structured notes. The letter was sent by Amy M. Starr, the Chief of the Office of Capital Markets Trends, Division of Corporation Finance. In the letter the SEC urges the structured note issuers to disclose key information with regard to the offerings, such as product pricing and use of issuing proceeds.
The SEC highlighted a number of potentially confusing aspects of structured notes and their offerings. The letter specifically mentions thetax consequences of investing in the structured notes,the potential misuse of positive-identifiers (such as "principal protected") in naming conventions, as well as the adequacy of disclosures related to liquidity and issuer-credit-risk. According to the letter, the SEC is even seeking to compile some of the more mundane -- but important -- details of structured note offerings: everything from the format of the documentation to the plan of distribution.
There are a few things that the SEC is not asking for that we believe may be of interest to potential structured note investors. For example, potential reverse convertible investors might appreciate knowing how often the underlying was delivered or the distribution of returns investors have realized on products with similar payoffs. Investors considering a callable structured note might want to know how often a similarly structured debt security was called by the issuer. Even more generally, an investor might want to know how the product would have performed historically given the same product structure and underlying asset.
We think this letter shows that the SEC is looking to correct some of the many disclosure shortfalls present in the offering documents of structured notes. Although we think they could have asked for more information and thereby suggest more details to be disclosed in offering documents, we believe this letter represents a step in the right direction.
