FINRA said it will examine firms’ supervision of higher-risk structured products from January 2022 through the end of 2025, with a focus on whether recommendations met Regulation Best Interest and FINRA rules.
The review centers on “worst-of” notes, whose payouts depend on the weakest asset in a basket and can cut principal at maturity or reduce interest payments.
FINRA said it found multiple cases of firms concentrating client assets in these products, leaving some investors with significant portfolio losses not correlated with broader market conditions.
Select firms will be asked about concentration limits, supervisory alerts, rep training, compensation and conflict-mitigation practices, though FINRA urged all firms selling the notes to reassess controls.
The scrutiny lands in a fast-growing market: U.S. structured notes reached $149.5 billion in 2024, up 50% from the prior year, according to Financial Planning Association data.
FINRA is probing 'worst-of' notes, but can Regulation Best Interest truly protect investors from products designed to be complex and opaque?
Will this regulatory crackdown stifle financial innovation or finally force banks to create genuinely safer products for retail investors?
As structured notes boom, are investors unknowingly buying into the next 'Lehman Brothers' style collapse due to hidden issuer credit risks?