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SEC Requires Structured Notes Value Disclosure, Law Firm Says

The U.S. Securities and Exchange Commission is requiring structured note issuers to disclose the estimated initial value of the securities, according to a bulletin from law firm Morrison & Foerster LLP.

The SEC’s division of corporation finance provided the guidance to the banks, the securities law firm wrote in its Jan. 16 Structured Thoughts newsletter. In a letter posted on the SEC’s website last April, the regulator asked issuers to boost disclosures to investors, including estimates of market value and an explanation of how they set up a secondary market for the securities.

The value of notes, which should reflect the price of the bonds and derivatives they contain, will have to be disclosed on the cover page of the offering prospectus, according to the law firm.

Kevin Callahan, a spokesman for the SEC, declined to comment on Morrison & Foerster’s letter.

While structured notes are typically sold at face value, their initial value may be as much as 10 percent lower, based on the market price of the options and bonds that make up the securities. The amount of the difference covers profits, distribution fees and other costs.

The SEC has been critical of how issuers appraise the securities, saying in its April letter that values they assign to the notes after a sale can “temporarily exceed the issuer’s or affiliate’s own estimate of the fair value of the product.”

The Morrison & Foerster report didn’t specify when issuers must adopt the new rules. Last year, Goldman Sachs Group Inc. and Bank of America Corp. began making disclosures on estimated initial values of their notes in offering documents.

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