A Brief History of FINRA Regulatory Scrutiny of Firms Peddling Steepener Notes

Steepener Notes are long-term, illiquid, and highly complex products that many brokerage firms have been peddling to unsuspecting clients over the past decade. Steepener Notes are a type of “structured product” that pays a quarterly or monthly interest payment that is tied to the yield curve, which measures interest rates on U.S. Treasury securities. The product typically pays a fixed rate (called a “teaser rate”) for the first 1-2 years, then pays based on the yield curve or other complex formula for the remainder of the term, which can be 10-30 years. Because of the way the payment is calculated, many Steepener and structured product investors have received little to no payments and are stuck in illiquid investments. Investors who try to sell Steepeners before they mature may be subject to penalties and substantial loss of principal.

Some brokerage firms have been pushing these investments on main-street investors without fully disclosing the risks and complexity involved. This goes against the firms’ obligations to investigate, understand, and adequately disclose information about the investments they recommend.

Over the past decade, several broker-dealer firms have been the subject to FINRA regulatory actions related to the improper sale of Steepeners:

• In 2013, FINRA fined Integral Financial LLC $50,000.00 for violations of various FINRA rules in connection with improper customer communications regarding complex investment products, including Steepeners. Specifically, FINRA’s Letter of Acceptance, Waiver and Consent states that the firm’s process for approving and supervising both public and private communications to investors about these products was inadequate.
• In 2013, FINRA fined McNally Financial Services Corp. $15,000.00 because the firm “failed to establish and maintain an adequate supervisory system and supervisory procedures governing its sales of steepeners.”
• In 2016, FINRA fined Investors Capital Corporation $250,000.00 for violations involving, among other things, unsuitable Steepener recommendations and inadequate supervisory procedures regarding the sale of Steepeners. In addition to the $250,000.00 fine, FINRA ordered the firm to pay more than $800,000.00 in restitution.
• In 2019, FINRA fined Newbridge Securities Corporation $225,000.00 for violating FINRA rules governing the sales of structured products, including Steepeners. In FINRA’s Letter of Acceptance, Waiver and Consent, FINRA notes that Newbridge did millions of dollars in sales of structured products, but failed to implement adequate policies and procedures for supervision of brokers’ recommendations of the products.

In addition to these regulatory actions, FINRA and the SEC have issued various guidance and investor alerts regarding the risks and complexity of Steepeners. Specifically, these regulatory bodies warn investors that these products only pay a fixed “teaser” interest rate for the first year or two, then pay based on a complex formula that could result in zero returns for prolonged periods of time. Additionally, investors should be weary that these notes are “callable”, meaning that the issuer can buy back the note at almost any time and stop paying investors interest.

As noted by FINRA in these regulatory actions, the brokerage firm that sold you Steepeners has various obligations to investigate and understand the products they sell you, as well as to supervise their brokers and financial advisors who market and sell these securities. If you were sold a Steepener Note and have sustained investment losses, you may be entitled to recovery for your losses.

The Silver Law Group is experienced in representing investors in securities and investment fraud cases nationwide. Our steepener note lawyers can help you recover investment losses due to stockbroker misconduct and most cases are handled on a contingency fee basis, meaning you won’t owe us any money until we recover your money for you. Scott Silver, managing partner of Silver Law Group, is the chairman of the Securities and Financial Fraud Group of the American Association of Justice and has extensive experience representing investors in securities and investment fraud cases. Please contact us for a confidential consultation at ssilver@silverlaw.com or toll free at (800) 975-4345.