Retail and Institutional Product Supervision
Product knowledge as a supervisory control
A supervisor must understand the risk features of the products the firm distributes. For retail products, focus on leverage, liquidity, fee structure, and complexity. For institutional products, focus on counterparty risk, settlement mechanics, and the sophistication of the counterparty. The core supervisory question is whether the product has been approved for the client segment to which it is being sold.
New product approval
Before a product is offered, the firm should complete a due-diligence review covering the issuer, the structure, the risks, the fees, and the suitability for each client segment. The review must be documented and refreshed when material facts change. A common trap is a product approved for one segment being sold to another without a new review.
Retail versus institutional
Institutional clients may be permitted to trade products unsuitable for retail clients, but only where the client meets the definition of permitted client or accredited investor and the firm has documented the qualification. The exam often tests whether a client's self-description as sophisticated is enough. It is not; eligibility must be verified against the defined criteria.
Traps to expect
Watch for questions about principal trading, where the firm sells from its own inventory; this requires disclosure and, in some cases, client consent. Also watch for products with embedded leverage or contingent liabilities that are described as "safe" because of a guarantee.
Worked rule of thumb
For any product, ask three questions: What can the client lose? How quickly can the client exit? What is the firm's own exposure? If any answer is unclear, the product is not ready for distribution.