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Commissioner Stein Sounds Warning on Complex Investment Products

SEC Commissioner Kara M. Stein recently spoke about the growth of esoteric investment products and cautioned that not all investment products necessarily ought to be created. She raised concerns on the adequacy of disclosures and the appropriateness of these investments for certain investors, comparing complex products to the creatures in science-fiction movie Jurassic Park. “How are these products being sold, particularly to retail customers? Even if the disclosure is perfectly clear, does it appropriately inform investor decision-making? If the Jurassic Park guests really understood what could go wrong, do you think they would go on the tour?” She pointed specifically to the growth of complex derivatives and market volatility-linked products. According to media reports, the SEC and CFTC are scrutinizing recent trading activity to detect potential misconduct. Stein discussed various ways to tackle the problem, including the not-yet-finalized Consolidated Audit Trail. “The CAT will be a critical tool for overseeing the capital markets and will better allow the Commission and the self-regulatory organizations (SROs) to catch up with the industry’s rapidly evolving technical sophistication.” She also charged stock exchanges that list complex products to effectively surveil for problems and to consider not listing products if they are unable to monitor them.  She added that part of the solution lies with industry gatekeepers: lawyers, accountants, exchanges, investment advisors, broker-dealers, and others who are charged with advising clients on their investments or how to comply with the law.

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