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"An investor's constant quest for the next big
thing plays right into the hands of fraudsters, who often use
the complexity of new products to hide their schemes," said SEC
Democratic Commissioner Luis Aguilar, in prepared remarks for
the annual North American Securities Administrators Association
conference.
In the aftermath of the 2007-2009 financial crisis, the SEC
created a series of units dedicated to conducting probes in
particular specialized areas.
The Complex Financial Instruments Unit is devoted to probing
cases involving complicated securities products.
That unit brought a number of cases against big banks that were
alleged to have misled more sophisticated investors in complex
structured products, such as collateralized debt obligations.
Aguilar noted that now, the unit is devoting more resources to
complex products that are being marketed to less sophisticated
retail investors.
Examples of such products, he said, include equity-indexed
annuities, leveraged and inverse exchange-traded funds, reverse
convertibles, alternative mutual funds, and structured notes - a
product that contains characteristics of both bonds and
derivatives.
Structured notes, he noted for instance, contain complex pay-off
structures and opaque pricing, and their issuance has been
growing since the crisis.
"The commission expects future enforcement cases in this space,"
he said, adding that compliance examiners are also actively
focused on complex products being sold to mom-and-pop investors.
Aguilar said Tuesday that more needs to be done than just going
after bad actors who may dupe unsuspecting investors.
He said that some have accused the SEC of failing to do enough
to beef up disclosures surrounding these products, and he agrees
more steps should be taken to help them understand these
products.
"These concerns are valid and deeply troubling," he said.
He noted that the SEC has focused a lot on structured notes
disclosures, but that it should expand to look at disclosures of
all complex securities sold to the general public.
(Reporting by Sarah N. Lynch; Editing by Lisa Shumaker)
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