On May 19, FINRA announced that it will conduct a review of how certain member firms oversee and recommend higher-risk structured products, with a particular focus on non-principal protected “worst-of” structured notes. In its letter to affected firms, FINRA defined “worst-of” structured notes as “principal-at-risk structured notes that may result in a reduction or cessation in interest payments, and/or a reduced return of principal at maturity, based on the worst-performing asset in a group of two or more reference assets.” The review will assess firm supervision of portfolio concentrations in these products and evaluate compliance with Regulation Best Interest (Reg BI), including its care and conflict of interest obligations, as well as applicable FINRA rules governing representative recommendations. FINRA said it has observed instances in which representatives built up concentrated customer positions in complex structured products, with some investors sustaining significant portfolio losses as a result.

In connection with the announcement, FINRA’s letter to affected firms requests information for the period from January 1, 2022, through December 31, 2025, on topics including: (i) written supervisory procedures related to structured notes and complex products; (ii) how firms categorized structured notes for supervision purposes, including classifications based on product risk; (iii) restrictions or concentration limitations placed on recommendations of structured notes; (iv) supervisory alerts and trigger criteria for concentration or Reg BI compliance; (v) structured product training requirements for representatives; (vi) compensation for sales of structured notes for registered representatives; (vii) how firms identify and mitigate product-related conflicts of interest; and (viii) whether firms provided general information to customers about these products and associated compensation. While the review targets a limited number of member firms, FINRA encouraged all firms that recommend these products to assess their own practices around training, internal guidance, controls, and supervisory frameworks.