ASIC stops Interactive Brokers from issuing SYEP derivatives to retail investors

The Australian Securities and Exchange Commission (ASIC) revealed it has issued an interim stop order to temporarily prevent Interactive Brokers Australia Pty Ltd from issuing Stock Yield Enhancement Program (SYEP) Derivatives to retail investors

According to the official announcement, the Aussie watchdog discovered deficiencies in the product’s target market determination (TMD) and product disclosure statement (PDS).

With the interim stop order in place, the broker cannot offer or issue a PDS or provide general advice about the SYEP derivatives to retail traders for 21 days unless the order is revoked earlier.

SYEP Derivatives allow retail investors to lend eligible securities to Interactive Brokers. They usually on-lend the securities to other parties for short selling. The original holder of the securities receives interest from the broker in return, as well as cash collateral put up by the broker to secure obligation to return the securities to the investor.

ASIC ban

The regulator stated in the official announcement:

ASIC made the interim orders to protect retail investors from acquiring SYEP Derivatives where they may not be suitable for their financial objectives, situation or needs. ASIC is also concerned that the PDS is defective.

According to ASIC, Interactive Brokers violated the regulations regarding TMD of SYEP Derivatives by incorrectly identifying target market investors, among other violations, as highlighted by the regulator.

In addition, the Australian regulator raised concerns about the securities lending risks and counterparty risks associated with the SYEP Derivatives if Interactive Brokers defaults. Moreover, the regulator noted that the PDS provided by Interactive Brokers was defective due to its omission of important information such as benefits, fees, and commissions, and included a misleading statement regarding the forfeiture of voting rights.

ASIC said:

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 in a timely manner. Interactive Brokers will have an opportunity to make submissions before a decision is made about any final stop orders.

The regulator pointed out that it has issued 24 interim stop orders under the design and distribution obligations (DDO), including the order for SYEP Derivatives. Of those, ASIC has lifted 19 interim stop orders after the entities took actions to address ASIC’s concerns or where the products were withdrawn.

The regulator stated:

A TMD is an important requirement under DDO. It is a mandatory public document that sets out the class of consumers a financial product is likely to be appropriate for (the target market) and matters relevant to the product’s distribution and review.

The regulator added that it is currently conducting targeted surveillance to ensure that product issuers and distributors are complying with DDO. In situations where firms are found to be non-compliant, ASIC has the authority to take swift action under DDO to disrupt any inappropriate behavior and prevent any potential harm to consumers.

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