Sales of structured products have slowed this year, possibly due to the U.S. Department of Labor’s fiduciary standard that is set to take effect next year.
 
The total dollar amount of new issues of U.S. structured retail products through May was about $42 billion, down around 25 percent from last year on an annualized basis, according to Thomas Selman, executive vice president of regulatory policy at the Financial Industry Regulatory Authority.
 
Low volatility and regulatory changes could be impacting volume, Selman told an industry gathering in New York last week, citing proprietary sales data from structuredretailproducts.com.
 
“One can assume that the DOL rule will discourage the sale of commission-sold products through the retirement channel,” Selman told attendees at a complex-products forum hosted by the Securities Industry and Financial Markets Association.
 
Structured products are sold with a commission, usually around two to three percent. In the U.S., the wirehouses are the main issuers.
 
Aside from the problem of being commissioned-based, the products are unsecured debt obligations of the issuing brokerage firm. That risk was highlighted in 2008 when structured notes backed by the bankrupt Lehman Brothers became worthless.
 
In prepared remarks at the conference, Selman raised yet another conflict—brokerage firms may be designing products to lay off risks they don’t want.
 
“Such activity could present serious regulatory issues,” he said.
 
Finra is also seeing more structured notes that put principal at risk, Selman added.
 
Traditionally, many of the products marketed to retail investors have offered full principal protection.
 
In addition, more structured notes are using multiple reference assets from which the return profile is calculated. That increases complexity, he said.
 
Selman reiterated that Finra requires additional training and heightened supervision of advisors who sell structured products.
 
The DOL rule created similar requirements for complex products in general.
 
An earlier version of the DOL rule would have flat out banned the sale of structured products to IRA owners, but the final version of the rule eliminated a proposed prohibited product list in favor of subjecting complex and illiquid products to heightened scrutiny.