In December 2009, FINRA issued its regulatory notice no. 09-73, relating to principal protected notes. The main portion of the notice is to remind FINRA members of potential disclosure issues with respect to principal protected (and “partially principal protected”) products, and products that are marketed with similar terms.

The notice may be accessed via FINRA’s website: http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p120596.pdf

In particular, the notice reminds FINRA members to ensure that their promotional materials and communications with the public contain clear and properly-balanced disclosures as to the nature of the principal protection that a product may offer. Appropriate disclosures should include:

  • the degree of principal protection;  
  • the credit risk of the issuer and any guarantor;  
  • any limitations on a product’s upside potential;  
  • any limitations on the investor’s ability to receive the return of his or her funds prior to maturity; and  
  • any costs or fees that might affect the return of principal.

The notice reflects ongoing concerns in the structured products market arising from the credit crisis, and the demise of Lehman Brothers and Bear Stearns. Disclosure issues relating to Lehman Brothers’ “principal protected notes” have become the focus of securities regulators from Hong Kong to New Hampshire. As a result, even prior to the issuance of the notice, many issuers and underwriters of structured products began to reconsider and revise their prospectuses and other marketing materials to clarify the meaning of “principal protected,” and to enhance the disclosures of the related risks.

In addition to these disclosure issues, the notice reminds FINRA members to review the suitability of these products for investors, and to ensure proper training of their personnel, prior to making a recommendation of these products.