FINRA Webcast Cautioned Brokers About Providing Accurate Information When Selling Structured Products, Like Lehman Notes

The Financial Industry Regulatory Authority cautioned brokers and financial advisors about providing accurate information to investors when selling structured products (like Lehman Principal Protected Notes) as early as 2005 in a notice to member firms.

In addition, FINRA offered a webcast for registered representatives to help educate them about structured products. In the webcast, Nileema Paragaonker, of FINRA, instructed brokers that they should sell structured products with care and make sure they are appropriate for customers.

“With structured products, liquidity needs and risk tolerance are especially important to consider because these products can be risky and lock up investment capital for a period of time,” Paragaonker said in the video webcast.

“While structured products may pay interest like debt securities, they may have very different profit and loss potential. They are not fixed-income securities. In some cases they are more like the combination of debt securities and options,” she added.

Paragaonker also said in the webcast: “Keep in mind that structured products are notoriously difficult to value and their costs and fees are extremely difficult to assess — even by experienced investors… Because of this, be sure that any sales material you send to your customer — even if it was prepared by the issuer — does not portray a structured product as conservative or a source of predictable income unless those statements are accurate, fair and balanced.”

Paragaonker cautioned that FINRA rules also prohibit exaggerated statements and factual omissions that can mislead a customer.

“FINRA has observed situations where sales materials used to supplement a product’s prospectus are not sufficiently balanced. You should know that providing risk disclosure in the prospectus does not make up for deficient disclosure in other sales material given to the customer, even if accompanied by the prospectus,” she said.