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The authors evaluate the preferences of retail investors with regard to the investment in structured financial products. The purpose of the paper is an analysis of the relative importance of key product attributes namely the issuing bank, the product structure, the associated costs and the disclosed risk.

The authors conduct a choice-based conjoint analysis, based on an online experiment. Participants judge their preferences for products which are presented by shortened key information documents according to the requirements of EU regulation.

Investors consider the costs and the product structure to be most important, whereas the issuer and information on risk are of less interest. Their preferences depend on their (self-evaluated) expertise: while inexperienced retail investors concentrate on costs, experienced investors pay more attention to the product structure.

The study is limited to a subsegment of the market, the discount certificates. For these products, issuing banks gain insight into the attractiveness of their products. Furthermore, the study carries implications for regulators: since investors emphasize the costs in their decisions, an unbiased disclosure of costs should be enforced.

While the recent literature has studied preferences for the investment in mutual funds, this is the first paper which directly analyzes the drivers of an investment in structured retail products.

To explain the inherent risks, draw attention to SEC and FINRA guidance, and suggest ways to limit and control the sale of structured securities to retail investors.

Explains potential problems with the sale of structured securities to retail investors; recommends marketing, disclosure, training, suitability, and supervision guidelines; summarizes the results of an SEC sweep examination; draws conclusions.

Both the SEC and FINRA have stopped short of saying that retail sales of structured products is unsuitable per se, but both have demonstrated unease about this activity and clearly indicated that firms who engage in it have heightened and specific disclosure, training, suitability and supervisory obligations.

Although firms certainly can sell these products in the retail market in a responsible and compliant manner, they should do so with thought, preparation and caution, because the regulatory agencies are watching.

Practical guidance from experienced financial services and securities lawyer concentrating on investment advisers and broker-dealers.

This paper aims to provide an explanation and evidence for the recent lack of retail financial product failures in Canada in the face of a (formal) regulatory failure.

The paper applies the literature on self-regulation and reputational risk management to a detailed investigation of the marketing of financial products to Canadian retail investors. Internal approval processes for many different players in the retail financial industry were analyzed in detail primarily using interviews.

The author was able to identify associations between structures and policies at financial firms and outcomes for retail investors. Knowing that prevention is more effective than mitigation, marketers of financial products would generally welcome increased state intervention in terms of more and better information disclosures.

The research contributes to our understanding of self-regulation in financial markets, specifically addressing what firm characteristics may be related to positive and negative outcomes for small investors in complex structured financial products.

Regulators may be able to imply the research findings in selectively allocating scarce resources to policing firms that may be more inclined to participate in riskier behavior. Financial firms may be able to influence the decisions relating to how regulations are designed and implemented and which products are sold to which clients to minimize reputation risk.

This is the first time, to the author's knowledge, that the reputation risk management channel has been analyzed in terms of influencing outcomes for retail (small) investors.

The purpose of this paper is to provide an overview of recent guidance from the FSA and industry, and recent case law regarding product providers and distributors

Explains current status of the guidance; provides overview of the guidance and its two component parts directed at “product providers” and “distributors”; discusses international dimensions; explains compliance implications; describes parallel trade association principles published in a July 2007 paper entitled Retail Structured Products: Principles for Managing the Provider‐Distributor Relationship; and summarizes three recent English judicial decisions relevant to the responsibilities and duties of providers and distributors.

The responsibilities of providers and distributors regarding retail structured products are being defined by an interaction of regulatory, common law, and soft law provisions. Just as the FSA's exercise of its regulatory powers is increasingly based less on detailed rules and more on general principles, so the judges' decision making is based less on doctrinal detail and more on a pragmatic assessment of the relevant facts as a whole.

Regarding retail products, the best approach for providers and distributors is to focus not only on detailed rules and contractual provisions but also on the factual detail of the arrangements, and whether the outcomes are fair to investors and meet their reasonable expectations as created by the firm.

Expert analysis provided by leading lawyers specialized in financial institutions.

To explain the practices that ESMA (European Securities and Markets Authority) recommends for investment firms and national competent authorities to implement when it comes to structured retail products (SRPs), in order to ensure sound product governance arrangements and the consistency of supervisory practices needed for adequate investor protection across the European Union.

Lists the ESMA guidelines for the general organization of product governance arrangements, breaks down the aspects manufacturers should consider in the making of their SRPs, highlights the need to understand the target market, explains the appropriate structure of the distributor’s and manufacturer’s distribution strategy, details how manufacturers establish a SRP’s value, recommends how investment firms deal with SRPs on the secondary market, and explains how manufacturers review the performance of their SRPs.

The competent authorities are still focusing on improving and enforcing investor protection. This ESMA opinion is just one example of how product governance structures and arrangements should be developed and implemented by everyone involved. It will be important to attend carefully to what MiFID 2 (Markets in Financial Instruments Directive 2) product governance requirements bring regarding investor protection in addition to the described ESMA opinion, which is based on MiFID 1.

Practical guidance from experienced finance lawyers.

This study looks at the characteristics and current status of retail structured product market of Korea and tries to explain, in particular, issues related to issue price, cost of hedging, and overpricing. We also analyzed the perspective of the government and the related regulatory policies. We examined various performance measures for portfolios composed of the KOSPI200 Covered Call Index and other assets in order to change the viewpoint of the authorities that the trading of structured products, such as ELS (equity-linked securities) and DLS (debt-linked securities), is in fact not a zero-sum game between the issuers and investors. The empirical results show that the KOSPI200 Covered Call Index has a superior performance compared to the KOSPI200 Index and the others. In addition, from the perspective of certainty equivalent excess returns, the KOSPI200 Covered Call Index also displays the possibility of improving the utility level of risk-averse retail investors. However, it is difficult in reality for individual investors to construct efficient portfolios that employ covered call strategies using options. Hence, individual investors can form optimal portfolios that benefit indirectly from such covered call strategies via investment in financial derivative products issued by securities firms that are able to more easily utilize investment strategies that incorporate options to form optimum portfolios. This means that both the issuer and investor can profit from these financial derivative products and, therefore, it is not a zero-sum game.

This paper introduces a monopolistic competition model containing retail investors with imperfect knowledge and issuers offering complex structured products. The model, for which we provide empirical evidences supporting the issuer’s profiteering by increasing the product complexity, can explain that knowledge asymmetry is the key for the issuer to offer complex product and to enjoy the higher excess profit, thus worsening allocative efficiency. Our empirical analysis reports monotonically increasing mark-up premia, and J-shaped issue amounts with respect to complexity: the former result could be explained in a rational framework considering issuer costs, however, the latter is not the case. Our model proves the empirical results are well explained when knowledge asymmetry between issuer and investors is a strictly increasing convex function of complexity.

The purpose of this paper is to provide of selected Financial Industry Regulatory Authority (FINRA) regulatory notices and disciplinary actions issued in January, February, and March 2012.

The paper provides Regulatory Notice 12‐03, January 2012, Complex Products: Heightened Supervision of Complex Products; Regulatory Notice 12‐05, January 2012, Customer Account Protection: Verification of Emailed Instructions to Transmit or Withdraw Assets from Customer Accounts; Regulatory Notice 12‐13, March 2012, Best Execution, SEC Approves Consolidated FINRA Best Execution Rule. It summarizes ten disciplinary actions for recommending unsuitable sales of unit investment trusts (UITs) and floating rate loan funds; using misleading marketing materials in the sale of a non‐traded real estate investment trust (REIT); selling interests in private placement offerings without having a reasonable basis for recommending the securities; unsuitable sales of reverse convertible securities; violating Regulation SHO (Reg SHO) and failing to properly supervise short sales of securities and marking of sale orders; misrepresenting delinquency data and inadequate supervision in connection with the issuance of residential subprime mortgage securitizations (RMBS); permitting a registered representative to publish advertisements that failed to provide a sound basis for a reader to evaluate the products and services being offered, contained exaggerated, unwarranted and misleading statements, and failed to disclose the firm's name; failing to conduct reasonable due diligence regarding securities an entity issued; failing to disclose certain conflicts of interest in research reports and research analysts' public appearances; and failing to develop and enforce written procedures reasonably designed to achieve compliance with NASD Rule 3010(d)(2) regarding the review of electronic correspondence.

The paper reveals for Regulatory Notice 12‐03 that the decision to recommend complex products to retail investors is one that a firm should make only after the firm has implemented heightened supervisory and compliance procedures; firms also should monitor the sale of these products in a manner that is reasonably designed to ensure that each product is recommended only to a customer who understands the essential features of the product and for whom the product is suitable. For Notice 12‐05 it finds that, given the rise in incidents reported to FINRA involving fraud perpetrated through compromised customer e‐mail accounts, FINRA recommends that firms reassess their specific policies and procedures for accepting and verifying instructions to withdraw or transfer customer funds that are transmitted via email or other electronic means, as well as firms' overall policies and procedures in this area. For Notice 12‐13: FINRA Rule 5310 leaves in place the general requirements of best execution, which are for a member firm, in any transaction for or with a customer or a customer of another broker‐dealer, to use “reasonable diligence” to ascertain the best market for a security and to buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.

These are direct excerpts designed to provide a useful digest for the reader and an indication of regulatory trends.

This study aims to investigate the impact of interest rates, the underlying asset and investment experience on the investment behavior of Japanese retail investors toward structured products (SPs).

Three treatments are constructed through internet-based survey experiments: interest rate, underlying asset framing and investment experience treatments. The interest rate treatment includes high- and low-interest rate environments. The underlying asset framing treatment includes equity and foreign exchange rates for the SP. The investment experience treatment includes experienced and inexperienced respondents for SPs.

The main finding of this study concerns the effect of the interaction between low-interest rates and investment experience. Specifically, SP-experienced investors tend to choose SPs in a low-interest rate environment and prefer equity-linked SPs, even though such SPs are overpriced. This finding is useful for financial regulators in formulating policies that protect retail SP investors in low-interest rate environments worldwide.

This study is the first to measure the sensitivities of investment behavior regarding the relative attractiveness of SPs to low-risk straight bonds, given interest rates, the underlying asset and investment experience. It provides evidence to support the development of SP regulations.