Global securities regulators are proposing new principles that aim to set out investor protection obligations for firms dealing in complex financial products.

The technical committee of the International Organization of Securities Commission Tuesday published a new report that proposes investor protection principles, including suitability and disclosure obligations, for the distribution of complex products. The committee, which is IOSCO’s key policymaking body, says that the report was prompted by concerns about suitability failures in the distribution of complex financial products that contributed to the financial crisis.

The paper notes that one important risk related to complex products is that clients may be investing in products that they do not understand, or that are inconsistent with their risk appetite or investment objectives. Additional risks include the possibility that certain complex financial products may be illiquid and difficult to sell, and/or that the product is subject to the issuer’s credit risk and/or involve a leveraged component that may multiply the risk.

And, in cases where products are manufactured by a firm that also sells it, it notes that it may be incentivized to sell its own products in order to generate revenues. “This risk may be particularly high during crisis period, where firms may face difficulties in raising capital from the public and alternative sources of revenues may not be available,” it notes.

Among other things, the proposed principles call for firms to be required to adopt policies to distinguish between retail and non-retail customers when distributing complex financial products; but nevertheless demands they manage conflicts of interest that arise in the distribution of complex financial products, regardless of how clients are classified. They also recommend that firms should have sufficient information to provide advice on complex products; that they should establish procedures to ensure compliance with suitability obligations; and that they should be required to develop policies that seek to eliminate any incentives for staff to recommend unsuitable complex financial products.

Additionally, the paper says that the regulatory system should provide for adequate investor protection, even when products are sold on an unsolicited basis; that regulators and self-regulatory organizations should supervise and examine firms on a regular basis to ensure compliance with suitability and other customer protection requirements.

Comments on the paper are due by May 21.