The securities industry is awaiting action from the Federal Reserve on a rule that could complicate the $40-billion-a-year structured-note business.

The proposal, first floated late last year, would among other things impose new requirements on big banks to issue more plain-vanilla, long-term debt that could readily be converted into equity in the event of a failure.

The proposal would cover systemically important banks, known as “GSIBs,” including the banks and wirehouses that issue structured notes.

The goal is to end taxpayer bailouts of too-big-to-fail institutions.

Notably, most structured products, which are unsecured debt obligations of the issuer, would not count as eligible long-term debt under the Fed’s current proposal.

A revised version of the proposal is expected late this year, according to industry sources.

What changes the Fed might make to the plan are unknown. But the revised rule “will look a lot like what they put out” in the original version, predicts Oliver Ireland, a partner at the Morrison & Foerster LLP law firm, who represents note issuers.

A Fed spokesman declined to comment.

What is clear is that the plan will impact the amount of structured products bank holding companies could issue.

“Several covered [bank holding companies] may need to limit the value of structured notes that they have outstanding,” the Fed warned in its preamble to the rule.

Limits are needed, the Fed said, because structured notes could complicate the work-out of a failed bank.

In the event of a failure and subsequent resolution, banks’ debt must be valued accurately and with minimal disputes, the Fed says in its proposal. But “structured notes contain features that could make their valuation uncertain, volatile, or unduly complex.”

Additionally, structured notes are often sold to investors who want exposure to a particular asset class, and imposing losses on them because a note issuer failed may create more obstacles to a resolution, the Fed states.

In comment letters earlier this year, financial industry associations argued that principal-protected notes should qualify as eligible debt under the plan since resolution values would be known in the event of a crisis.

In the meantime, big banks are setting up subsidiaries to issue the products because subsidiaries will not be subject to a cap on non-eligible liabilities, as the holding companies would be under the proposal.

In the end, banks may be able to maintain note issuance through these new subsidiaries, Ireland said.

The Fed’s proposal is just the latest new regulatory hurdle for the struggling structured-products industry.

Through the first half of this year, sales of structured products have fallen by a third from last year. Volume is now running at about a $40 billion annual pace, according to Structuredretailproducts.com, which tracks the industry.

Lack of volatility and the pending DOL rule have impacted volume, according to some observers. Structured notes were on the DOL’s initial hit list of banned products, although that list was dropped in the final rule.

But the DOL, like other regulators, has warned firms about the sale of complicated products like structured notes.

Now the Fed has weighed in, disfavoring the products as a source of capital for too-big-to-fail institutions.