The Financial Industry Regulatory Authority has launched a formal review of how broker-dealers supervise concentrated client positions in some of the structured products market's most complex instruments, putting firm compliance programs squarely in the spotlight.
FINRA announced Tuesday it will examine firm practices related to non-principal protected "worst-of" structured notes – a category that includes products where payoffs are tied on the worst-performing asset in a group of two or more reference assets.
The regulator said it has identified multiple instances in which representatives concentrated client assets in products carrying both a lack of principal protection and worst-of features, a combination it describes as presenting "particularly complex features."
"Highly concentrated investments can pose risk, and that risk is heightened when the concentrated investment is a complex product," FINRA said in its announcement. "Some investors have lost significant portions of their portfolios through such concentrated positions."
The sweep also builds on concerns FINRA flagged in its most recent annual compliance report. The regulator's 2026 Annual Regulatory Oversight Report specifically cited firms making recommendations of complex or risky products that result in concentrations exceeding their own internal limits, or comprising a sizable portion of a retail customer's liquid net worth in a manner inconsistent with that customer's risk tolerance, as a recurring Reg BI compliance failure.
The structured note sweep signals that FINRA is now moving from flagging the pattern to actively examining the firms behind it.
Through a sweep letter sent to a subset of member firms, FINRA is requesting detailed documentation covering the period from Jan. 1, 2022, through Dec. 31, 2025.
The eight-question information request asks firms to produce written supervisory procedures for structured notes and complex products, describe how they categorized those instruments for supervision purposes, and detail any restrictions or concentration limitations they placed on recommendations.
Firms are also being asked to explain what supervisory alerts or exceptions they had in place – including any concentration or Reg BI suitability alerts – and to provide copies of any structured product training materials, including whether completion was required before representatives were permitted to sell.
Notably, the sweep asks firms to state how registered representatives were compensated for structured note sales, a question that cuts directly to the conflict-of-interest obligations embedded in Regulation Best Interest compliance frameworks that have been central to regulator scrutiny in recent years.
FINRA also wants to know whether firms disclosed to customers the compensation received by the firm or its representatives on structured note sales, and to provide copies of any documents used to deliver that information.
Structured products combine a traditional security – typically a bond – with a derivative component. Rather than holding an underlying portfolio, the note issuer promises to pay a return based on a formula tied to the performance of one or more reference assets.
As of 2024, structured notes were a $194 billion market, according to data from SPi. Halo Investing co-founder and president Jason Barsema previously told InvestmentNews that growth has been underpinned by "advisor demand for both defined outcome and protective investing strategies," among other forces.
"As equity prices continue to push higher, and as a result, market valuations, investors have been seeking more conservative ways to deploy cash for fear of missing out on a stock market rally that may continue,” Barsema said.
In the case of worst-of notes, FINRA says investors potentially face "a reduction or cessation in interest payments, and/or a reduced return of principal at maturity, based on the worst-performing asset in a group of two or more reference assets."
Such poor outcomes have been on display in some high-profile cases over the years, including the long-running saga around a fallen star broker at Stifel and a recent million dollar-plus penalty against Fidelity Brokerage Services.
FINRA has previously flagged structured products as an area warranting heightened supervisory scrutiny. While the products can offer the potential for higher returns than their reference assets, they also carry unique risks that their terms and features may not always make transparent to retail investors.
The regulator said the formal review will affect only a subset of member firms, though it did not specify how many or how they were selected.
The organization said it "encourages all firms that recommend these products" – not just those directly swept – to review the questions in the letter and evaluate their own training, guidance, controls and supervisory structures.
A $141M judgment and a federal asset freeze collide over one shrinking pool
The firm's CFO and EVP of Wealth Management Solutions are the latest executives to exit the broker-dealer.
Clients are saying they would consider switching advisors if another professional offered estate planning services, according to a new Trust & Will survey.
CEO Laurel Taylor says the fintech's composable AI stack helps workers optimize dollars across Trump Accounts, 529s, 401(k)s, and other employee benefits.
The bank has swiped three private banking veterans from BNY as the city climbs the ranks of America's fastest-growing wealth hubs.
Dan Biagini of American Equity says the steady decline of pensions, longer lifespans and a reset in interest rates are rewriting how advisors build retirement income
Direct indexing is on pace to outgrow ETFs and mutual funds. Northern Trust's Ken Lassner explains why the advisors who get it wish they had started sooner.
