Abstract:
On July 11, 2007, Bloomberg News reported that Massachusetts Secretary of State William Galvin was probing the sales practices of structured products firms to investors in the state. "Structured products are becoming more complex, increasing the possibility that investors will buy `unsuitable investments,' said Galvin in a statement. The probe focused on Bank of America, Citigroup, Morgan Stanley, Wachovia Corp., Linsco/Private Ledger Corp. and Cantella & Co.
On December 11, 2007, Secretary Galvin announced that the state would be taking action against Cantella & Company, not only for failing to have adquate procedures in place; it accused the firm of creating procedures after the date of the inquiry to make it appear as if Cantella did have policies and procedures in place. (Presumably, the other firms had adequate policies and procedures in place.) Click here for a copy of the Complaint.
This is a highly significant (though isolated) development. It is the first time that a regulatory authority has taken action against a financial services firm for the marketing of structured products. To Secretary Galvin's credit, the state issued a 4-page set of policies and procedures of its own for marketing structured products to Massachusetts investors.
Structured products professionals, legal and compliance departments and interested parties should pay close attention to this case, as (1) a cautionary tale of the importance of having up-to-date policies and procedures, and (2) as a reminder that regulators will be scrutinizing structured products much more closely since the industry surpassed $114 billion in sales in 2007.
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From boston.com's December 12, 2007 posting, reported by Chris Riedy: Galvin charges Cantella with failure to supervise
Massachusetts Secretary of State William F. Galvin charged Cantella & Co. with failure to supervise its representatives in the sale of highly complex and risky investment vehicles called structured products. In a statement, Cantella, a Boston broker-dealer, said it has "acted properly." Galvin's office defines structured products as "securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance, and/or a foreign currency." (Chris Reidy)
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From Bloomberg News' July 11, 2007 article, written by Sree Vidya Bhaktavatsalam and Stacie Servetah: Massachusetts Is Probing `Structured Products' Sales
July 11 (Bloomberg) -- Bank of America Corp., Citigroup Inc. and other firms that sell derivatives known as structured products to investors including retirees have been sent initial letters of inquiry by Massachusetts securities regulators.
Structured products are becoming more complex, increasing the possibility that investors will buy ``unsuitable investments,'' Secretary of the Commonwealth William Galvin, Massachusetts' top securities regulator, said today in a statement.
The products are bonds or notes based on an underlying index such as the Standard & Poor's 500.
Sales of structured products are expected to climb 56 percent to $100 billion in 2007, with about half of that going to retail or individual investors, according to Keith Styrcula, chairman of trade group Structured Products Association in New York. Some of the securities pay interest, making them popular with retirees.
``It encompasses a range of esoteric offerings being sold to investors who aren't as sophisticated,'' Galvin said today in an interview. Structured-product sales ``remind us of problems with variable-annuity sales practices targeting older investors.''Galvin fined Citizens Financial Group Inc. $3 million in 2005 for pressuring elderly customers to buy variable annuities without properly disclosing risks. Galvin also pressed Bank of America to cash in annuities held by some senior citizens without penalties. Variable annuities combine the investment features of mutual funds with insurance coverage.
`Healthy Inquiry'
In the latest inquiry, letters have also been sent to units of Morgan Stanley, Wachovia Corp., Linsco/Private Ledger Corp. and Cantella & Co., according to the statement.
``As a matter of policy, we cooperate fully with all requests by regulators for information,'' Christy Pollak, a spokeswoman for Morgan Stanley, said in an interview. Christy Phillips-Brown, a spokeswoman for Wachovia, said the company cooperates with inquiries from regulators. Officials at the other firms didn't return calls seeking comment.
``I'm confident that firms have stringent internal policies,'' said Styrcula, who founded the Structured Products Association in 2003. The trade group has about 2,000 members, including executives from Bank of America and Citigroup.
"This is a healthy inquiry that will be good for the structured-products industry.''
Galvin has started at least two other probes this year that are looking into business practices of banks and brokers. He cracked down on UBS AG last month, accusing it of unethical practices in dealing with hedge-fund advisers. He also subpoenaed UBS and Bear Stearns Cos. for writing upbeat reports on subprime lenders.
SPA weblink: http://structuredproducts.org/initiatives//5/
Reuters link: http://www.reuters.com/article/governmentFilingsNews/idUSN118858720070711
Boston Globe link: http://www.boston.com/business/ticker/2007/07/galvin_begins_i.html
Website: Secretary Galvin Files Complaint Against Cantella and Co., Inc. Regarding Structured Products:
http://www.sec.state.ma.us/sct/sctcan2/can2idx.htm
Complaint (PDF, 1.1mb)
Massachusetts Structured Products Guidance see:
Structured Products Guidance (PDF, 88kb)
SPA-2008
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