The Financial Industry Regulatory Authority said on Tuesday that it will review how firms supervise their concentrations in higher-risk structured products, specifically non-principal protected worst-of structured notes.
The regulator said it will review how firms comply with Regulation Best Interest and FINRA rules when their registered representatives recommend these products to investors.
Structured products typically combine a traditional security, like a bond, with a derivative component, and do not hold an actual underlying portfolio of investments. The issuer promises to pay a return based on a formula that incorporates the performance of one or more reference assets.
Risks include terms and features being different and significantly more complex, which may warrant heightened supervisory scrutiny.
FINRA said it has identified multiple instances where firms concentrate their customers' assets in structured products, exposing investors to losses not correlated with overall market conditions.
Some investors have lost significant portions of their portfolios through such concentrated positions, according to the securities industry supervisor.
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