The U.S. Financial Industry Regulatory Authority Inc. (FINRA) is initiating a compliance review due to concerns about retail investors being potentially harmed by high concentrations in risky structured products. This review focuses on the industry’s sales of complex structured notes, specifically those known as “worst-of” structured notes. These products base their returns on the poorest performing asset in a group, raising investor protection concerns due to their complexity and risk.
FINRA has noted multiple instances where firms have concentrated clients’ assets in such structured products, increasing both complexity and risk, particularly with notes lacking principal protection and those featuring “worst-of” characteristics. The organization highlights that highly concentrated investments can pose significant risks, which are exacerbated when involving complex products. Some investors have suffered substantial portfolio losses from such concentrated positions.
The review will assess how firms manage clients’ concentration in these risky products and ensure compliance with “Regulation Best Interest” (RegBI) and other rules, including duties of care and conflict of interest obligations when recommending these products to investors. While structured products may offer higher returns compared to their reference assets, they also entail unique risks, with terms and features that can be significantly more complex, necessitating enhanced supervisory scrutiny.
