Attendees at the 47th annual SEC Speaks conference hosted by the Practicing Law Institute found that everything old is new again.
Concerns over complex products once again came to the fore as Commissioner Kara Stein raised her concerns over whether the next-generation of complex products are appropriate for retail investors and whether they should be available to every type of investor.
Citing exotic strategies like straddles, strangles, iron condors, iron butterflies, twin-win notes, worst of notes, and buffered supper track notes, she questioned how many retail investors, as well as sales professionals, truly understood how these new products work.
SEC Commissioner Kara Stein worries about retail investors not understanding risks of complex products. #SECSpeaks18 pic.twitter.com/qk7gFLj06H
— Mark Schoeff Jr. (@MarkSchoeff) February 23, 2018
Even more concerning to her has been their incorporation into passive investment strategies.
The rise in passive investments, as well as their typical blandness of following broad-based indexes like the S&P 500, have been a cattle call for financial engineers to create new products, according to Commissioner Stein.
"Today, indices have bespoke algorithmic methodologies and frequent rebalancing," she added. "They can look more like active management than a purely passive instrument.”
Commissioner Stein turned to the Spielberg epic Jurassic Park to question the wisdom of creating "something scary, dangerous, and unpredictable."
She quickly clarified that was not calling all complex products the financial equivalents of tyrannosaurus rexes or velociraptors, but that they deserved serious consideration.
“We know we can build products that take advantage of our technological and engineering capabilities,” said Commissioner Stein. “But the question should not be: ‘Can we develop and sell to investors a product that does XYZ?’ The question out to be; ‘Should we develop or sell to investors a product that does XYZ?’”
SEC Commissioner Kara Stein compares investment risk connected to complex products to "Jurassic Park." Maybe she'll take a question on Oscar race. #SECSpeaks18
— Mark Schoeff Jr. (@MarkSchoeff) February 23, 2018
When the panel conversation turned to the hot topic of cryptocurrency, the regulator is moving with all due caution before establishing policy, according to Dalia Blass, director of the Division of Investment Management at the SEC.
"Cryptocurrencies have raised questions of valuation, liquidity, custody, arbitrage, and potential manipulation," said Blass. "These are not easy questions, and people are working through them."
Investment Management Division Director Dalia Blass #cyrptocurrency is dear to our policy agenda @janetnovack #SECSpeaks18 #bitcoin
— Ted Knutson (@TedKnutsonDC) February 23, 2018
Usually, a proponent of the free market, fellow panelist former-SEC Commission Daniel Gallagher approved of the Commission's approach due to opaque nature of cryptocurrencies.
"It's an area fraught with bad actors and products," he said. "If you put the imprimatur of The 40 Act on a pile of crap, it is still crap. And creating futures contracts does not change it."
#SECSpeaks18 - Former commissioners urge SEC investment management staff to proceed cautiously with innovative cryptocurrency products
— Jay Baris (@jaybaris) February 23, 2018
