ASIC has made two interim stop orders preventing Interactive Brokers from issuing Stock Yield Enhancement Program (SYEP) Derivatives to retail investors because of deficiencies in the product’s Target Market Determination and Product Disclosure Statement.
The interim orders prohibit Interactive Brokers from offering, issuing, giving a PDS for or providing general advice about SYEP Derivatives to retail investors. The orders are valid for 21 days unless revoked earlier.
ASIC made the interim orders to protect retail investors from acquiring SYEP Derivatives that may not be suitable for their financial objectives, situation, or needs. ASIC is also concerned that the PDS is defective.
SYEP Derivatives are arrangements whereby a retail investor may agree to lend eligible securities to Interactive Brokers, which may on-lend the securities to other parties for short selling or other purposes.
In return, Interactive Brokers pays consideration, less its fees and commissions, to the retail investor and delivers cash collateral to secure its obligation to return the securities to the investor. Retail investors in SYEP Derivatives are exposed to risks related to securities lending, including the impact of short selling on the value of their securities, counterparty risk if Interactive Brokers defaults, loss of voting rights and tax consequences associated with substituted dividend payments and corporate actions.
ASIC was concerned that the TMD for SYEP Derivatives:
- Inappropriately included in the target market investors who declare that their investment objectives include preservation of capital and income generation, or hedging, whereas these objectives are likely inconsistent with the features and risks of the product;
- Included knowledge and experience criteria for the target market that are not described with objective, tangible parameters;
- Specified an unreasonably long period for distributors of SYEP Derivatives to report complaints and other matters to Interactive Brokers; and
- Specified inadequate and poorly defined triggers for reviewing whether the TMD remains appropriate.
Further, ASIC was concerned that the PDS was defective because, among other things, it omitted important information about the benefits, fees, and commissions of the SYEP Derivatives, contained a misleading statement about forfeiture of voting rights, and was not worded and presented in a clear, concise, and effective manner.
ASIC expects Interactive Brokers to consider the concerns raised regarding the TMD and PDS and take immediate steps to ensure compliance. ASIC will consider making a final order if the concerns are not addressed promptly. Interactive Brokers can make submissions before a decision is made about any final stop orders.
To date, ASIC has issued 24 interim stop orders under the Design and Distribution Obligations. Nineteen of these have been lifted following actions taken by the entities to address ASIC’s concerns or where the products were withdrawn, but five remain in place.
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