The SEC is taking a much-needed closer look at “protected” securities.

In the aftermath of the recent economic meltdown, the U.S. Securities and Exchange Commission is requiring financial firms to provide information on how they market “principal-protected” notes to their investors.

Principal-protected notes are complex securities that are typically marketed as carrying a money-back guarantee on an investor’s principal. These investments are making a comeback after losing their allure in 2008 when Lehman Brothers collapsed, causing investors to lose millions on what they believed to be “safe, secure, investments” in principal-protected Lehman notes.

The SEC wants to know if investors in “principal protected” securities are being misled into thinking the principal of their investments will not
decline in value because of the misleading name of the security and the way the risks and benefits of the product are explained and marketed. Although these issues are not new, they are receiving a fresh wave of criticism from regulatory authorities, such as the SEC, in response to the economic events of 2008.

This year, Bank of America Corp., Barclays PLC , Citigroup Inc , HSBC Holdings PLC and JP Morgan Chase & Co. all have filed offering statements with U.S. securities regulators to sell principal-protected notes that guarantee investors the return of either 95 percent or 100 percent of their initial
principal investments. Even if the underlying investment does not pay off, the SEC wants to make sure these institutions are disclosing the risks associated with such a seemingly attractive product.

In December, the Financial Industry Regulatory Authority issued a notice to firms reminding them to exercise caution when promoting and marketing principal-protected notes to investors. Although this may not protect willfully blind or even hopeful investors, it is a step in the right direction.