Equity Linked CDs meet the Regulators
Both the SEC and NASD have recently expressed “interest” in equity linked CDs. Their concern revolves around whether they should be regulated as securities rather than bank instruments. I have another concern: Equity linked CDs may be just about the worst understood, most misrepresented financial product available.
I will stipulate that an investment with the upside potential of stocks combined with downside principal protection sounds mighty good. With the lessons of 2000-2002 fresh in their minds, spooked investors might reasonably find the sales pitch attractive. And they did. It’s a hot new thing. The fact that investors seldom have a clue what they are really buying is immaterial. (They are not really new. I wrote about them first in January of 1998.)
About the only thing you could do to make the concept worse is to wrap it inside an annuity. So, of course, Wall Street has. You can expect to hear all about it from your friendly insurance salesman. Interestingly enough, as an insurance product, the annuity escapes regulation as a security.
Both the banks and insurance companies are taking the position that even though the performance of the product is “linked” to the performance of a securities index, they are not securities, and are not subject to registration or regulation by either the SEC or NASD. These technical distinctions blur the line, preventing uniform regulatory standards from being applied to offerings that look and act like securities.
By flying under the securities regulator’s radar, banks and insurance companies avoid all those pesky disclosure and suitability standards that accompany securities registration. Inevitably this leads to investors being offered and sold products that they often do not understand, and which are not suitable for their needs. Finally, if they seek restitution, they may have much higher hurdles to clear before they can recover than if the product had been registered as a security. None of this is good for the average investor.
Equity Linked CDs should be regulated like any other security. That implies full disclosure, registration, suitability standards and security licensing of salespeople.
