| NEW YORK, April 11
NEW YORK, April 11 The U.S. Securities and
Exchange Commission told five big Wall Street banks last year to
improve disclosures about structured notes that are mostly sold
to retail investors, and criticized use of the term "principal
protected" in marketing materials.
The SEC sent letters to JPMorgan Chase & Co, Bank of
America Corp, Citigroup Inc, Goldman Sachs Group
Inc and Morgan Stanley on April 12, 2012, with 14
comments about their marketing, pricing and distribution
practices for structured notes that the banks issued from April
2009 through March 2012.
SEC staff said that using the term "principal protected" for
structured notes should also come with disclosures about risk.
The correspondence between the banks and the SEC were
released this week.
Structured notes are unsecured bonds that are paired with
derivatives, which guarantee the return of an initial
investment, as well as some portion of any profits that come
from the derivatives trade. However, the investments are not
entirely risk-free: repayment of the bond is based on the
credit-worthiness of the note issuer.
For instance, when Lehman Brothers filed for bankruptcy,
holders of its "100 percent principal-protected notes" were
treated like other unsecured creditors. UBS AG, which
sold those notes to its brokerage clients, lost a series of
related arbitration cases before the Financial Industry
"Note titles using the term 'principal protected' should
also include balanced information about limitations to the
principal protection feature," the SEC said, adding that issuers
should "clearly describe the product in a balanced manner and
avoid titles that stress positive features without also
identifying limiting or negative features."
In responses to the SEC, all five banks said they do not
currently use the term "principal protected" and will continue
to review titles of structured notes to ensure they reflect
risks as well as positive attributes.
The SEC also pressed the banks to disclose more information
about the pricing of structured notes, saying that some issuers
inflate prices above fair value for a limited period of time
after an offering, and then change those values later. The
agency also said that issuers offer "better" prices to certain
investors, and asked the banks to disclose more about their
pricing and distribution.
Banks said they offer discounts for investors who buy the
notes in large quantities, but that otherwise prices are set
according to market demand.
Structured notes can be a meaningful source of funding for
As of Dec. 31, 2011, JPMorgan had $35 billion worth of
structured notes outstanding, representing 13.5 percent of its
long-term funding; Bank of America had $38.6 billion worth of
structured notes outstanding at Dec. 31, 2011, representing 10.4
percent of long-term funding; Citigroup had $26.3 billion worth
of structured notes outstanding as of March 31, 2012, roughly
8.4 percent of its total long-term debt.
Goldman Sachs had $21 billion worth of structured notes at
Dec. 31, 2011, representing 9.4 percent of its unsecured
funding. The SEC granted Morgan Stanley's request to keep its
structured note issuance data confidential.