Sales Practice Obligations Attorneys

FINRA Reminds Brokerage Firms of Sales Practice Obligations Relating to Principal-Protected Notes

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The Financial Industry Regulatory Authority (“FINRA”) recently reminded its member brokerage firms of their obligations when recommending and selling principal protected notes (“PPNs”). PPNs have been marketed to retail investors as combining the safety of bonds, but with the potential for growth that generally is not provided by bonds. But these products actually are complex, structured financial instruments that often do not provide nearly as much safety as brokerage firms represented.

FINRA issued Notice to Members 09-73 (“NTM 09-73″). Such regulatory notices serve, among other things, to remind brokerage firms of FINRA’s rules regarding the recommendation and sale of securities. In NTM 09-73, among other things, FINRA reminded brokerage firms that:
(1) they are required to be fully familiar with the characteristics and risks of PPNs,
(2) they are required to educate and train their brokers about the characteristics and risks related to PPNs before they let their brokers recommend the investments, and
(3) they are not permitted to exaggerate the level of safety associated with principal protected notes.

Incidentally, NTM 09-73 was issued only two weeks after a FINRA arbitration panel awarded an investor $200,000, finding that her UBS broker inappropriately sold her risky Lehman Brothers principal protected notes.

This was not the first time that FINRA f/k/a National Association of Securities Dealers (“NASD”) has felt the need to remind its members of their obligations when selling structured products. In 2005, the NASD issued Notice to Members 05-59. That notice similarly stated “As a result of a recent review of members that sell structured products, NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers.”