SPA Conference: New rules may keep small investors from biting off more than they can chew, panel says

By Sheri Kasprzak

New York, Oct. 16 - The Securities and Exchange Commission has redefined its definition of the term "accredited investor," and according to at least one panelist at the Structured Products Association's 3rd Annual Summit in New York Tuesday, this is a good thing.

Sharon Brown-Hruska, an economist with NERA Economic Consulting, said redefining that test is a good thing for the smaller retail investors that may not be able to take on the risks associated with certain types of securities, including structured products.

"The retail market, at least from the perspective of the regulators, seems to have expanded," Brown-Hruska said. "The SEC has raised the level for accredited investors and they want to make sure smaller investors are not buying more complex products than they can handle."

In Washington, Brown-Hruska pointed out, a period of "regulatory scrutiny" is beginning and this will impact the sellers of structured products both domestically and globally.

"From my experience, you've [investment banks] always been more than happy to disclose fees and transaction terms and to solidify the suitability standards of investors," she said.

In other regulatory news, Brown-Hruska said the U.S. Treasury Department issued a request for public comment on merging the National Association of Securities Dealers and the Commodity Futures Trading Commission.

This particular idea, she noted, has already caused an uproar because an agency that is focused on market-specific regulations would be forced into an environment of standardized regulations.

"I don't think it will happen," she pointed out, "but I hope people will get out there and talk about these issues."

In other regulatory news, Thomas Humphreys of Morrison & Foerster said the tax treatment of structured notes is tricky but could really be summed up by the categories.

"There are three types of notes," Humphreys insisted.

What Humphreys termed "Type 1" notes are principal-protected notes and should be considered debt from a taxation standpoint.

If the notes are not principal protected, the tax treatment depends on whether the notes are coupon-bearing. If they are not, it's a "Type 2" note and a forward contract under tax law.

If the notes are coupon-bearing, they're "Type 3" notes and are "self-help" notes under tax law, Humphreys said.

The Type 1 notes are contingent payment debt regulated notes and are subject to ordinary accruals.

Type 2 notes have no accrual of interest and capital gains and are taxed at a 15% rate.

Type 3 notes are more complicated and there really isn't any guidance on them, Humphreys said.

"We don't know," he said. "It's something new in the universe. We don't have any guidance from the IRS."

These notes, he said, would likely be taxed at the standard rate.

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