Reuters: Regulatory News: U.S. firms take longer to approve complex funds for sale

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U.S. firms take longer to approve complex funds for sale Sep 27th 2012, 19:53 Thu Sep 27, 2012 3:53pm EDT * Execs on panel say influx of products makes due diligence take longer * Wells, UBS build out systems to screen clients By Jessica Toonkel NEW YORK, Sept 27 (Reuters) - With increased regulatory scrutiny of complex exchange-traded funds and exchange-traded notes, big brokerage firms are taking longer to make them available to financial advisers, according to speakers at SIFMA's Complex Products Forum. In some cases, the firms have decided that the time it would take to conduct due diligence on complex ETFs, or even a mutual fund, is not worth the effort, said Paul Weisenfeld, managing director of funds at Morgan Stanley Wealth Management, in a panel discussion at the forum on Thursday. This means that financial advisers - and many of their clients - may not be able to access more sophisticated products or, at the very least, will have to wait several months before they can buy them. "It used to be that once a product got a ticker everyone could get it," said one conference attendee who declined to be named because he was not permitted by his employer to speak to the press. "Now the firm blocks the ticker until they approve it for sale." The U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority in recent years have stepped up their focus on complex ETFs, such as leveraged and inverse exchange traded-funds, as well as exchange-traded notes. Leveraged and inverse ETFs are designed to amplify short-term returns by using debt and derivatives while exchange-traded notes are debt securities issued by banks. The number of ETFs and ETNs has jumped over the years, with 1,454 ETFs, 205 of which are exchange-traded notes, now on the market, according to Morningstar. Given the increase in the number of these products being launched, brokerage firms have to spend more time than ever doing due diligence, brokerage firm executives on the panel said. Some products might not get approved because the firm simply has not had time yet to review them properly, said Robert Forsyth, director, exchange traded products at UBS Financial Services. "At UBS we block many products because they are too new and we haven't had a chance to review them," he said in the panel discussion. "With so many new products coming out, we just don't have the time or manpower to review all of the products." The due diligence applies both to the firms' own products as well as those created by other providers, Forsyth said. For example, the investment banking arm of UBS offers a number of volatility-based exchange-traded notes, none of which UBS allows its own financial advisers to sell, Forsyth said after the panel discussion. For those products that do pass muster, the brokerages still set restrictions on who can buy them. UBS and Wells Fargo & Co, for example, have built systems to help assure that more complex products are only available to suitable clients. UBS' classification system takes into account a number of criteria, such as an investors' risk tolerance, income, total net worth, when deciding which investors can have access to complex products. The system has more than 20 criteria. "You can have a very unsophisticated investor with a huge net worth, so you need to look at a variety of factors," Forsyth said. Wells Fargo has a system created to restrict sales of certain products to only clients that have a relevant investment objective, said Dan Moorman, senior vice president, of mutual funds, ETFs and unit investment trusts at Wells Fargo Advisors, the brokerage arm of Wells Fargo, in the panel discussion. Similarly, the firm has enhanced its systems so that when certain types of orders come in, the client receives disclosures about the potential risks of those complex products, he said. For smaller brokerage firms, the increased due diligence on complex products can be a particular challenge, said one wirehouse executive who spoke anonymously because he is not allowed to speak to the press. "FINRA holds every broker dealer accountable," he said. In opening remarks at the conference, FINRA Chief Executive Richard Ketchum said the agency is looking closely at how firms sell complex products, with a particular focus on potential conflict of interest and training [ID:nL1E8KR65Y}. Link this Share this Digg this Email Reprints

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