In June, FINRA and the SEC Office of Investor Education and Advocacy jointly issued an Investor Alert entitled Structured Notes with Principal Protection: Note the Terms of Your Investment. The joint Investor Alert seeks to explain to investors how these products work and what risks they may entail.  

The term “structured note with principal protection” refers to any structured product that combines features of a bond with a derivative component and that offers a full or partial return of principal at maturity. For example, the promised return of principal could resemble a zero coupon bond, which pays no interest until maturity, while the derivative component promises a return linked to the S&P 500, or other underlying index, asset, or benchmark.  

The Investor Alert warns investors that some of these products offer only partial principal protection – for example 10% rather than 100% return – and states that investors typically will receive principal protection from the issuer only if they hold the note until maturity – typically ranging up to 10 years from issuance. The Investor Alert also addresses fees, costs, tradeoffs, and taxes, and provides a list of questions to ask before investing in these products.  

Meanwhile, FINRA officials have made public statements admonishing broker-dealers to fully understand, effectively supervise, and offer robust training concerning these products. FINRA’s warnings follow settlement of an enforcement matter alleging that certain advisers misled clients about the complex “principal protection” feature of structured notes by Lehman Brothers Holdings Inc. that were sold a few months before the firm collapsed.

Also, see “SEC Breaks Silence on Indexed Products” in this section about an Investor Bulletin that the Office of Investor Education and Advocacy recently issued concerning certain insurance products that can have many features similar to structured notes with principal protection.