The SEC and FINRA settled charges that a financial services firm failed to adequately disclose certain fees and commissions in the offering materials the firm provided to retail investors.
The SEC and FINRA found that the offering materials, which provided disclosure about the sales commission and annual fee, were materially misleading because they failed to adequately disclose information about a "third fixed, regularly occurring cost included in its proprietary volatility index known as the 'Execution Factor.'"The Execution Factor was "designed to reflect the transaction costs that would be incurred in implementing a strategy that replicates the Index."The SEC found that including the Execution Factor cost in "the total mix of information available" would be important to a reasonable retail investor" in light of the disclosure of other fixed, regularly occurring costs" associated with the structured notes.
The firm agreed to pay $10 million to the SEC and $5 million to FINRA.
Commentary
This case is the second brought against a structured notes issuer for misleading statements included in offering materials for structured notes that failed to adequately disclose certain costs embedded in the calculation of a proprietary index. This case serves as further notice that the SEC "is keeping a close eye" on "structured notes with payouts and indices that use highly complex formulas to determine how the index is valued." (see SEC's: "Structured Products – Complexity and Disclosure – Do Retail Investors Really Understand What They Are Buying and What the Risks Are?") Issuers and underwriters alike should ensure that they are taking steps to understand, and disclose, any potential costs implicated by proprietary indices to which their structured notes are linked.
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