FINRA has issued a regulatory notice this month that stresses the need for brokerage firms to disclose the risk to investors in so-called Principal-Protected Notes. The notice, which may be viewed here, cautions firms from overstating the level of protection inherent in this structured product.
When marketing this product, firms may overstress the principal protection feature of the product without adequately disclosing the fact that such a feature is contingent on the continued credit worthiness of the guarantor. Principal protection is often rendered moot in cases where the guarantor files for bankruptcy - case in point: Lehman Brothers.
Many investors were sold Lehman Principal Protected Notes through their respective brokerage firms. When Lehman Brothers filed for bankruptcy, these notes were effectively rendered worthless. This came as a surprise to many investors who thought they had purchased a product which guaranteed capital preservation.
A number of Financial Industry Regulatory Authority (FINRA) arbitration claims have been filed against brokerage firms who marketed and sold Lehman PPNs. One such arbitration claim has resulted in a favorable award an investor sold Lehman PPNs by their broker, UBS. Such an award provides hope that future claims may prove equally equitable for investors.
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