FINRA Issues Regulatory Notice Aimed at Principal Protected Notes

FINRA has issued a regulatory notice this month that stresses the need for brokerage firms to disclose the risk to investors in so-called Principal-Protected Notes. The notice, which may be viewed here, cautions firms from overstating the level of protection inherent in this structured product.

When marketing this product, firms may overstress the principal protection feature of the product without adequately disclosing the fact that such a feature is contingent on the continued credit worthiness of the guarantor. Principal protection is often rendered moot in cases where the guarantor files for bankruptcy – case in point: Lehman Brothers.

Many investors were sold Lehman Principal Protected Notes through their respective brokerage firms. When Lehman Brothers filed for bankruptcy, these notes were effectively rendered worthless. This came as a surprise to many investors who thought they had purchased a product which guaranteed capital preservation.

A number of Financial Industry Regulatory Authority (FINRA) arbitration claims have been filed against brokerage firms who marketed and sold Lehman PPNs. One such arbitration claim has resulted in a favorable award an investor sold Lehman PPNs by their broker, UBS. Such an award provides hope that future claims may prove equally equitable for investors.

FINRA arbitration is a dispute resolution process offered by the Financial Industry Regulatory Authority (FINRA) to resolve conflicts between investors, brokerage firms, and individual brokers. Unlike traditional court litigation, arbitration is typically faster and less formal. In this process, an impartial arbitrator or a panel of arbitrators listens to both parties’ arguments and evidence before making a binding decision. This method is often chosen for its efficiency and lower costs, making it an attractive option for investors seeking resolution without the complexities of a court trial. The arbitration process is governed by specific rules and procedures, ensuring a fair and equitable hearing. While the decision is final and generally cannot be appealed, parties can still settle the dispute before the arbitration concludes. FINRA arbitration serves as a crucial mechanism in maintaining market integrity and protecting investors’ rights.