FINRA Expresses Concern about Principal Protected Notes

FINRA issued a regulatory notice this month to remind brokerage firms of their sales practice obligations relating to the sale of principal protected notes. The executive summary provides:

The retail market for principal-protected notes (PPNs) has grown in recent years, in part because they are often marketed as combining the relative safety of bonds with a potential for growth not available with traditional fixed income products. However, these products are not risk-free, and their terms and structures can be complex. Firms must ensure that their promotional materials or communications to the public regarding these products are fair and balanced, and do not overstate either the level of protection offered or an investment’s potential returns. Firms also have a duty to ensure that their registered representatives understand the risks, terms and costs associated with these products, and that they perform an adequate suitability analysis before recommending them to a customer.

Among other things, the FINRA notice reminds brokerage firms that in marketing PPNs, they must ensure their communications accurately and fairly explain how the securities operate. Promotional materials must disclose the level of principal protection offered, the credit-worthiness of the guarantor, the potential returns and pay-out structure, the investor’s ability to access funds and any costs or fees that might affect the return of principal. FINRA also advises representatives to perform an adequate suitability analysis based on the aforementioned aspects and components of the PPN.

The risks of PPN’s were highlighted with the highly publicized Lehman Brothers’ Principal Protected Notes. Brokers at UBS and other firms pitched these products as similar to buying a basket of stocks (such as the S&P 500) but with the added benefit of up to 100% principal protection if the market went down. However, Lehman Brothers declared bankruptcy in September 2008 and the notes became worthless.

Blum and Silver, LLP is actively involved in representing investors in PPN cases. For further information, please contact us.