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.
====
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)
====
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
Thursday, March 6, 2008
SPA to Congress: Handle Tax Changes with Care (structuredretailproducts.com)
by Lori Pizzani, US news reporter
StructuredRetailProducts.com
WASHINGTON D.C. (March 5, 2008) -- The US Structured Products Association (SPA) today asked US lawmakers to take a slow and even-handed approach when considering tax changes to all financial instruments and investments as they consider a bill seeking to impose higher taxes on derivative products.
Giving testimony earlier today to the House of Representatives Ways and Means Subcommittee on Financial Derivatives Taxation, the industry body asked whether adding potentially burdensome taxes on those investing in structured products would deepen the competitive financial market chasm that has developed between the US and other nations globally.
The testimony, given by Keith Styrcula, chairman and founder of the SPA, implored Congress to be thoughtful when considering tax changes to an array of financial products. "We agree wholeheartedly with the Subcommittee that new legislation on the taxation of retail financial instruments is in order. Such legislation, however, should analyse all investment vehicles at the ground-level -- inclusive of ETFs, closed-end funds, mutual funds, convertible bonds, managed accounts, insurance products, unit investment trusts and single-stock positions -- to arrive at a fair and consistent approach to taxation of financial instruments," said Styrcula.
"Any attempt to single out financial derivatives, prepaid forwards, and structured products in the absence of a full consideration of all other financial instruments is a potentially dangerous precedent that could have vast and unforeseen consequences in the global arena."
Styrcula highlighted the growing local structured products industry, which grew from $64bn in 2006 to $114bn by the end of 2007, and asked the committee to consider any unintended consequences of a sudden change in tax laws, including widening the current competitive gap between the US capital markets and its global rivals.
He also said that capital-guaranteed investments had the potential to follow the European model and become, "the dominant investment vehicle for prudent American investors, if it weren't for a significant drawback -- an exceptionally disadvantageous tax treatment."
If, however, the tax treatment of capital-guaranteed products were simple and reasonable to the investor, the US financial services industry would be able to promote them on a larger scale while generating substantial revenue for the Treasury, he predicted, citing analysis from SRP.
Following pressure from the Investment Company Institute, the US trade organisation representing the $11tr mutual fund and exchange-traded fund industry, Representative Richard Neal introduced a bill (H.R. 4912) to the House of Representatives on 19 December 2007 seeking to impose more stringent taxes on derivative instruments, including prepaid forward contracts (such as exchange traded notes).
Click here <http://www.structuredretailproducts.com/uploads/news/SPA_tax_testimony.pdf> for the full written testimony of the US SPA.
StructuredRetailProducts.com
WASHINGTON D.C. (March 5, 2008) -- The US Structured Products Association (SPA) today asked US lawmakers to take a slow and even-handed approach when considering tax changes to all financial instruments and investments as they consider a bill seeking to impose higher taxes on derivative products.
Giving testimony earlier today to the House of Representatives Ways and Means Subcommittee on Financial Derivatives Taxation, the industry body asked whether adding potentially burdensome taxes on those investing in structured products would deepen the competitive financial market chasm that has developed between the US and other nations globally.
The testimony, given by Keith Styrcula, chairman and founder of the SPA, implored Congress to be thoughtful when considering tax changes to an array of financial products. "We agree wholeheartedly with the Subcommittee that new legislation on the taxation of retail financial instruments is in order. Such legislation, however, should analyse all investment vehicles at the ground-level -- inclusive of ETFs, closed-end funds, mutual funds, convertible bonds, managed accounts, insurance products, unit investment trusts and single-stock positions -- to arrive at a fair and consistent approach to taxation of financial instruments," said Styrcula.
"Any attempt to single out financial derivatives, prepaid forwards, and structured products in the absence of a full consideration of all other financial instruments is a potentially dangerous precedent that could have vast and unforeseen consequences in the global arena."
Styrcula highlighted the growing local structured products industry, which grew from $64bn in 2006 to $114bn by the end of 2007, and asked the committee to consider any unintended consequences of a sudden change in tax laws, including widening the current competitive gap between the US capital markets and its global rivals.
He also said that capital-guaranteed investments had the potential to follow the European model and become, "the dominant investment vehicle for prudent American investors, if it weren't for a significant drawback -- an exceptionally disadvantageous tax treatment."
If, however, the tax treatment of capital-guaranteed products were simple and reasonable to the investor, the US financial services industry would be able to promote them on a larger scale while generating substantial revenue for the Treasury, he predicted, citing analysis from SRP.
Following pressure from the Investment Company Institute, the US trade organisation representing the $11tr mutual fund and exchange-traded fund industry, Representative Richard Neal introduced a bill (H.R. 4912) to the House of Representatives on 19 December 2007 seeking to impose more stringent taxes on derivative instruments, including prepaid forward contracts (such as exchange traded notes).
Click here <http://www.structuredretailproducts.com/uploads/news/SPA_tax_testimony.pdf> for the full written testimony of the US SPA.
Ways & Means Hearing on Taxation of Prepaid Forwards -- Links
Subcommittee on Select Revenue Measures
Hearing on Tax Treatment of Derivatives
Wednesday, March 05, 2008
Hearing Advisory
Neal Announces Hearing on Tax Treatment of Derivatives
Witness List and Testimony (Printer Friendly)
Witnesses
Panel 1:
Michael J. Desmond, Tax Legislative Counsel, United States Department of Treasury
Alex Raskolnikov, Associate Professor of Law, Co-Chair, Charles E. Gerber Transactional Studies Program, Columbia Law School
Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan Law School
Keith A Styrcula, Chairman, on behalf of Structured Products Association
Panel 2:
George U. “Gus” Sauter, Chief Investment Officer, The Vanguard Group; Managing Director, Quantitative Equity Group
William M. Paul, Covington & Burling, LLP, on behalf of Investment Company Institute (ICI)
Leslie B. Samuels, Partner, Cleary Gottlieb Steen & Hamilton LLP on behalf of Securities Industry and Financial Markets Association (SIFMA)
Michael B. Shulman, Partner, Shearman & Sterling LLP
Submissions for the Record
Click here to provide a submission for the record.
Hearing Transcript
Not Yet Available
Printed Hearing
Not Yet Available
====
Additional links:
www.structuredproducts.org -- SPA Official website
http://waysandmeans.house.gov/news.asp?formmode=release&id=628 -- Neal Opening Statement at March 5, 2008 Hearing on Tax Treatment of Derivatives -- "This topic is not for the faint of heart. Just explaining the different types of derivatives can fill volumes. Plus, the market is constantly evolving and growing. The Bank for International Settlements recently estimated the market for derivatives has exceeded $500 trillion in notional amounts just for the first half of last year. And for those taking notes, 500 trillion is half a quadrillion."
Hearing on Tax Treatment of Derivatives
Wednesday, March 05, 2008
Hearing Advisory
Neal Announces Hearing on Tax Treatment of Derivatives
Witness List and Testimony (Printer Friendly)
Witnesses
Panel 1:
Michael J. Desmond, Tax Legislative Counsel, United States Department of Treasury
Alex Raskolnikov, Associate Professor of Law, Co-Chair, Charles E. Gerber Transactional Studies Program, Columbia Law School
Reuven S. Avi-Yonah, Irwin I. Cohn Professor of Law, University of Michigan Law School
Keith A Styrcula, Chairman, on behalf of Structured Products Association
Panel 2:
George U. “Gus” Sauter, Chief Investment Officer, The Vanguard Group; Managing Director, Quantitative Equity Group
William M. Paul, Covington & Burling, LLP, on behalf of Investment Company Institute (ICI)
Leslie B. Samuels, Partner, Cleary Gottlieb Steen & Hamilton LLP on behalf of Securities Industry and Financial Markets Association (SIFMA)
Michael B. Shulman, Partner, Shearman & Sterling LLP
Submissions for the Record
Click here to provide a submission for the record.
Hearing Transcript
Not Yet Available
Printed Hearing
Not Yet Available
====
Additional links:
www.structuredproducts.org -- SPA Official website
http://waysandmeans.house.gov/news.asp?formmode=release&id=628 -- Neal Opening Statement at March 5, 2008 Hearing on Tax Treatment of Derivatives -- "This topic is not for the faint of heart. Just explaining the different types of derivatives can fill volumes. Plus, the market is constantly evolving and growing. The Bank for International Settlements recently estimated the market for derivatives has exceeded $500 trillion in notional amounts just for the first half of last year. And for those taking notes, 500 trillion is half a quadrillion."
Subscribe to:
Posts (Atom)
