FINRA is conducting a targeted review of member firm practices related to the supervision of non-principal protected “worst-of” structured notes over a look-back period of 2022 through the end of 2025. FINRA’s focus is on Regulation Best Interest, including the Care Obligation, and how member firms supervise customer concentrations in “worst-of” structured notes. FINRA is assessing member firm compliance with supervisory rules, including compliance with written supervisory procedures and surveillance systems.
Specific requests include:
- Copies of written supervisory procedures;
- Classifications (if used) for structured notes, particularly those based on principal protection or “worst of” features;
- Any limitations placed on recommendations for structured notes, whether by classification or otherwise;
- Training procedures and supervisory monitoring of structured notes;
- Compensation and conflict of interest mitigation, including how representatives are paid for sales; and
- Customer disclosures and communications provided to customers.
The full sweep letter is available here. Member firms might consider undertaking their own review and assessment of their written supervisory procedures, their product classifications, their offering materials, their due diligence of distributors, their educational materials, and evaluate the overall effectiveness of their processes.