A National Securities Arbitration & Investment Fraud Law Firm

American Association for Jusice
Legal Leaders
Multi-Million Dollar Advocates Forum
Top 100
Public Justice
AV Preeminent
Florida Legal Elite 2011
5th Annual Most Effective Lawyers 2009

Steepener Notes - FINRA Issues Warning Regarding Complex Products

FINRA has classified Steepener Notes (“Steepeners”) as highly complex, structured investments that operate as a speculative bet on the shape of the yield curve. Investment returns on Steepeners are connected to the spread between longer term interest rates and short term interest rates.

Steepeners are often risky, illiquid and difficult to sell on the secondary market. Moreover, the maturity period for steepneers are often very long, averaging from 20-30 years. Adding another layer of complexity, Steepeners have a derivative component that provides for different stated returns during the lifetime of these products. As an example, Steepeners often provide investors with a “teaser” coupon rate for the first year of holding them. Following this first year, Steepeners will usually offer variable rates for subsequent years, based on the steepness of the yield curve. This is where Steepeners get their name, the “steepness” of the yield curve.

Due the complexity of structured products, like Steepeners, FINRA has issued warnings and guidance to broker dealers, related to firms’ duties to train their representatives about the unique products before selling them to investors. Steepeners are frequently not suitable for retail investors or should be a very small part of your portfolio.

Heightened Supervision of Complex Products

In its Regulatory Notice 12-03, FINRA warned its member firms that complex products, including but not limited to Steepeners, are often difficult for retail investors to understand. Due to this difficulty, FINRA has advised firms to adopt and implement thorough procedures for conducting due diligence about these products before selling them. FINRA has also advised firms to adopt and implement thorough procedures for supervising the marketing and sale of these products to investors.

FINRA’s Guidance Regarding due Diligence of Steepeners

Before broker dealers can recommend Steepeners, or any other security, FINRA requires that they must conduct a reasonable investigation about the product, its features, its risk and the issuer’s representations about it. This FINRA-imposed duty to conduct adequate due diligence on a product arises from FINRA’s Suitability Rule 2111, which firms must comply with:

“A member's or associated person's reasonable diligence must provide the member or associated person with an understanding of the potential risks and rewards associated with the recommended security or strategy. The lack of such an understanding when recommending a security or strategy violates the suitability rule.” FINRA Rule 2111.05(a).

Pursuant to FINRA’s Suitability Rule, when a broker dealer recommended a security to customer, that firm is making the representation “. . . that a reasonable investigation has been made and that [its] recommendation rests on the conclusions based on such investigation.” FINRA Reg Notice 12-03, p.2.

Therefore, if broker dealers fail to conduct reasonable due diligence regarding Steepeners, or any other product, these firms may be liable to investors who they have sold these products to.

To provide broker dealers with guidance as to how they can comply with their due diligence obligation, FINRA has stated that “[f]irms should have formal written procedures to ensure that their registered representatives do not recommend a complex product to a retail investor before it has been thoroughly vetted. Those procedures should ensure that the right questions are answered before a complex product is recommended to retail investors.” Id., at 6.

FINRA’s Guidance Regarding Marketing and Sale of Steepeners

FINRA emphasizes the importance of firms’ obligation to train their registered representatives about Steepeners before selling them to investors. For example, registered representatives must have a sophisticated understanding of Steepeners, including an understanding about Steepeners’ payoff structure, limits on the upside potential for returns and the risks associated with the payoff structure.

Not only must registered representatives understand the payoff structure of Steepeners, they must also have a thorough understanding about the risks of these products. FINRA provides a not exhaustive list of features that a registered representative must understand about Steepeners, including but not limited to:

  • the characteristics of the reference asset;
  • its historic performance and volatility and its correlation with specific asset classes;
  • any interrelationship between multiple reference assets;
  • the likelihood that the complex product may be called by the issuer; and
  • the extent and limitations of any principal protection.

In addition to training registered representatives about the risks and features of Steepeners, FINRA has also advised firms that they must ensure that their representative are able to sufficiently articulate the risks and features of Steepeners to investors. According to FINRA, registered representatives who sell Steepeners should discuss the following aspects about these products with their customers:

  • the key features of the product;
  • how it is expected to perform under different market conditions;
  • the risks and the possible benefits
  • the costs of the product; and
  • the scenarios in which the product may perform poorly

Registered representative must ensure that they facilitate the investors’ understanding of Steepeners, when they discuss these aspects about these products with them. Further, following their discussions with investors, representatives must also consider whether they believe that the investor truly has a grasp about the nature of Steepeners before recommending them.

Silver Law Group May Be Able to Help You Recover Steepener Note Investment Losses

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.

Several Florida brokerage firms were large sellers of steepener notes. Investors have alleged these investments were unsuitable and the risks weren’t disclosed. Our Florida and New York securities arbitration attorneys can help you recover improper losses.

The Silver Law Group is experienced in representing investors in securities and investment fraud cases nationwide. Our 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.

Client Reviews
“My in-laws lost their retirement funds to a dishonest broker. Silver Law Group and Scott Silver aggressively pursued their losses until he got their money back.” Ben M.
“I foolishly gave my money to a con artist promising me a great return on my money. Scott Silver zealously handled the matter, recovering my losses.” Darren S.
“I almost lost a lifetime of earnings after trusting the wrong person. Silver Law Group guided me through the arbitration process and a mediation, always fully prepared and committed to my case.” Scott T.