SEC Examiniation Priorities 2014
(Jan 2014)
The Securities and Exchange Commission (SEC) senior staff recently announced their 2014 examination priorities . The national examination program will be focusing on fraud detection and prevention, corporate governance, and registrants that serve as both a broker-dealer and investment adviser.
SEC staff also plans to undertake initiatives that examine the rollover of retirement vehicles during employment transitions or near retirement. In particular, the staff is concerned about misleading...
Behringer Harvard / TIER REIT Illustrates How Non-Traded REIT Sponsors and Brokers Have Siphoned $10 Billion to $20 Billion (and Counting) From Investors
(Jan 2014)
Sponsors have issued, and brokers had sold, over $85 billion of non-traded real estate investment trusts (REITs) by the end of 2012. These investments are illiquid, high-commissioned, poorly diversified real estate investments. Despite their glaring defects another $20 billion of non-traded REITs were sold to investors in 2013.
Sponsors and brokers have siphoned off at least $20 billion from investors through their sales of non-traded REITs up through 2012. We illustrate the calculation of...
FINRA Regulatory Priorities 2014
(Jan 2014)
Early this month, the Financial Industry Regulatory Authority (FINRA) released their 2014 regulatory and examination proirities . FINRA is continuing to focus on the suitability of recommendations made to retail investors. FINRA specifically mentions complex structured products (including leveraged ETFs), non-traded REITs, frontier funds, and interest rate sensitive instruments such as mortgage-backed securities and municipal bonds. At a recent conference, a FINRA representative added that...
Self-Indexing in Commodity-Linked Investments - Citi CUBES
(Dec 2013)
Over the past few weeks and months, we've noticed a pattern in the products coming across our desks: structured investments linked to esoteric proprietary indexes, created by the same bank that issued the product. We touched on this topic a bit when we discussed self-indexing in the context of structured certificates of deposit, but we thought we'd revisit the issue with a few of the examples that we've been looking into more recently. The examples we'll discuss each reference a proprietary...
SEC Scrutinizing Exchange Traded Notes
(Dec 2013)
Risk.net is reporting that the Office of Capital Markets Trends of the Securities and Exchange Commission (SEC) is looking into the details of exchange traded notes (ETNs). The office, headed by Amy Starr, is looking into the fees and the disclosure of risks and formulas used to determine ETN indicative values according to statements made by Starr at the Structured Products conference in Washington, DC on December 10.
ETNs have been a frequent subject on the blog and regulators have issued...
FINRA Action Against JP Turner for Unsuitable Leveraged ETF Sales
(Dec 2013)
Last Thursday, FINRA ordered JP Turner, an Atlanta-based broker-dealer, to pay restitution related to sales of leveraged and inverse exchange-traded funds (ETFs) and excessive mutual fund switching. The total restitution to 84 customers totaled over $700,000.
Leveraged and inverse ETFs are extremely complex investments, that are designed for professional traders and are generally considered unsuitable for buy-and-hold investors. One fundamental issue with leveraged and inverse ETFs is that...
Monte Carlo Simulation, Explained
(Nov 2013)
Valuing products with exotic derivatives can be difficult since these products typically have complex payoff formulas. One of the most flexible methods for valuing such products is called Monte Carlo simulation. At SLCG, we use Monte Carlo simulation in a lot of our work, so we thought it would be helpful to explain a bit about it and show how it can be used to estimate the future returns of an asset.
The basic idea behind Monte Carlo simulation is to determine the statistical properties...
Variable Annuity Fees Linked to the VIX -- Part II
(Nov 2013)
In our last post, we discussed a whitepaper that proposed linking the fees in a variable annuity to the CBOE Volatility Index (VIX). That paper ran a simple backtest of a variable annuity fee tied to the VIX over the period from 1990-2012, assuming certain parameters, and then compared the result to a fixed fee annuity over the same period. We have replicated their approach between January 1990 and January 2013 and found that not only are the fees and ending account values comparable, but so...
Variable Annuity Fees Linked to the VIX -- Part I
(Nov 2013)
We've discussed the CBOE Volatility Index -- known as the VIX-- many times before. Essentially, the VIX is a very complex calculation of the expected future variance of the S&P 500 (see the full calculation methodology), and is popularly known as the 'investor fear gauge'. The VIX is not a tradeable asset, but there are VIX options and futures contracts, and those contracts serve as the basis for several VIX-related exchange-traded products (TVIX, XIV, VXXto name a few). The VIX is very...
