FINRA Opens Sweep Focused On Concentrations In High-Risk Structured Notes

FINRA has announced a review of member firms’ supervision of concentrations in non-principal protected “worst-of” structured notes, given the unique risks the regulator says these products present to investors. “Worst-of” notes generally tie key terms, such as interest payments and/or return of principal at maturity, to the worst-performing asset within a group of reference assets. While FINRA has acknowledged the benefits that such products may deliver to retail investors, it suggests the instruments’ heightened complexity warrants additional compliance scrutiny.

The sweep letter issued by FINRA asks firms to demonstrate that they have reasonably designed written supervisory procedures, controls, surveillance and training related to these products. Among other things, FINRA is requesting information about how firms classify structured notes by risk feature (including principal protection and worst-of characteristics), whether they impose concentration limits or other restrictions on