What Are Range Accrual Notes?
Range accrual notes are structured debt securities that pay interest only when a reference rate—such as SOFR, a Constant Maturity Swap (CMS) rate, or an equity index—stays within a predefined range on each observation day.
They are issued by major investment banks including J.P. Morgan, Citigroup, Barclays, and Morgan Stanley, and sold through broker-dealers and financial advisors to retail investors seeking yields above what traditional bonds offer.
So the coupon formula is deceptively simple: the investor earns the maximum stated rate multiplied by the fraction of days the reference rate remains in range. If the rate stays within the range every day of the quarter, the investor receives the full coupon. If the rate falls outside the range for half those days, the investor receives half. If the reference rate is out of range for the entire period, the investor receives nothing—zero income despite holding a note that may have been marketed at 7–12% annually.
A common subtype is the “steepener” note, which ties the coupon to the spread between long-term and short-term CMS rates—typically the 30-year CMS rate minus the 2-year CMS rate. Steepener notes pay higher coupons when the yield curve is steep, and zero when the curve flattens or inverts. Other variants include equity range accruals linked to the S&P 500, dual-index notes requiring two conditions to be met simultaneously, and SOFR-linked range accruals that replaced older LIBOR-based structures.
What Are the Hidden Risks of Range Accrual Notes?
Range accrual notes expose investors to the risk of receiving zero income for extended periods—sometimes years—while their principal remains locked in an illiquid product. The conditional coupon structure means income is not guaranteed; it depends entirely on market conditions the investor cannot control or predict.
Steepener notes amplify this risk through leverage. A note with a 50x leverage factor on the CMS 30-year minus 2-year spread will pay a coupon only if that spread exceeds a minimum threshold. When the U.S. Treasury yield curve inverted in July 2022 and remained inverted for approximately 793 consecutive days—the longest inversion in over 45 years—steepener note investors received zero coupon payments for more than two years.
Issuer credit risk adds another layer. Range accrual notes are unsecured obligations of the issuing bank. If the issuer defaults, the investor’s claim ranks alongside other general creditors regardless of the reference rate’s performance. The collapse of Lehman Brothers in 2008 demonstrated this risk: investors holding Lehman-issued structured notes lost their entire principal.
How Do Investors Lose Money on Steepener Notes?
Investors lose money on steepener notes in two ways: lost income during periods when the yield curve is flat or inverted, and principal losses if they are forced to sell before maturity in an illiquid secondary market.
Consider an investor who purchased a $500,000 steepener note in early 2022 with a 10% first-year teaser coupon and a floating formula of 4x (CMS 30-year minus CMS 2-year) thereafter. After the initial year, the yield curve inverted. The CMS 30-year rate dropped below the 2-year rate, making the spread negative. With a floor of 0%, the note paid nothing. That investor received zero income on a half-million-dollar investment for more than two years while the note’s secondary market value fell by 30–50%.
The call feature compounds the problem. Most range accrual and steepener notes are callable by the issuer. When conditions favor the investor—a steep yield curve generating attractive coupons—the issuer calls the note, terminating the income stream and returning principal. When conditions are unfavorable and coupons drop to zero, the issuer has no incentive to call. This asymmetry means investors are trapped in the worst outcomes and cut off from the best ones.
How Are Range Accrual Note Fees Hidden from Investors?
Range accrual note fees are embedded in the gap between the purchase price and the note’s estimated initial value—a figure the SEC requires issuers to disclose on the prospectus cover page, but which most retail investors never see or understand.
A Citigroup SOFR CMS Spread Range Accrual Note filed with the SEC in 2022 disclosed an estimated initial value of just $850 per $1,000 note—a 15% embedded cost at issuance. That gap included an underwriting discount of up to $50 per note (5%), plus structuring fees, hedging markups, and the issuer’s expected profit margin. On a $100,000 investment, the investor absorbed up to $15,000 in costs on day one.
Academic research confirms these markups are not anomalies. A study published in the Quarterly Journal of Economics found that adding one complexity feature to a structured product increases the yearly markup by 0.33 percentage points. Range accrual notes with leverage, callable features, and dual-index conditions stack multiple complexity layers—each one widening the cost gap and making it harder for investors to assess fair value.
Why Do Brokers Recommend Steepener Notes Despite the Risks?
Brokers recommend steepener notes because the products generate higher upfront compensation than comparable fixed-income alternatives. Selling commissions on range accrual and steepener notes typically range from 1.5–5% of principal, paid by the issuing bank and baked into the product’s price—far more than the commissions earned on Treasury bonds, CDs, or bond ETFs.
This compensation structure creates a direct conflict of interest. A broker earns more selling a single steepener note than building a diversified bond portfolio that may better serve the investor’s income needs. FINRA has identified failure to supervise as a central problem when firms do not adequately review structured product recommendations against customer profiles, including risk tolerance, investment timeline, and concentration levels.
Revenue-sharing arrangements between issuers and distributors add a second layer of conflict. The banks that create range accrual notes maintain financial relationships with the broker-dealers that sell them, incentivizing firms to promote complex proprietary products over simpler alternatives that may better serve the investor.
Are Steepener Notes Suitable for Retirement Accounts?
Steepener notes are unsuitable for most retirement accounts because the products carry risks that directly conflict with the income stability and capital preservation goals of retirees. A conservative investor relying on portfolio income to cover living expenses cannot afford two or more years of zero coupon payments—yet that is exactly what happened to steepener note holders during the 2022–2024 yield curve inversion.
FINRA Regulatory Notice 12-03 requires firms to conduct heightened suitability reviews before recommending complex products like structured notes. The notice explicitly names both “steepener notes” and “range accrual notes” as examples requiring this scrutiny. Firms must evaluate whether a less complex, less costly product could achieve the same income objective—and for most retirees, a diversified bond portfolio or CD ladder achieves that goal without the conditional coupon risk of a range accrual note.
Despite these requirements, elderly investors continue to be sold steepener and range accrual notes by brokers who fail to disclose how the products perform under adverse yield curve conditions. FINRA arbitration filings involving structured notes sold to retirees have increased alongside the record $149.4 billion U.S. structured notes market in 2024.
Recent Steepener Note Cases and Enforcement Actions
FINRA and the SEC have pursued several significant actions involving structured product misconduct, and our firm is actively investigating claims on behalf of investors who suffered losses from range accrual and steepener notes.
J.P. Morgan Securities LLC — $200,000 FINRA Fine (August 2022). FINRA censured and fined J.P. Morgan for failing to supervise a registered representative who purchased more than $108 million in securities for a senior customer’s account, $77 million of which were structured notes. The customer’s structured note concentration rose from 14% to 43% of liquid net worth within two months, exceeding the firm’s 15% internal guideline. Structured note losses totaled $5.5 million. A related FINRA arbitration resulted in a $9 million award to the customer.
Wedbush Securities / Mark Augusta — $1.8 Million FINRA Arbitration Award (July 2017). A FINRA arbitration panel awarded $1,797,100 to Agatha and John Dancy, ages 87 and 91, after their Wedbush broker sold them steepener notes—including Lloyds TSB Bank Steepener Notes and Citigroup Medium Term Notes—along with other unsuitable investments. The panel imposed punitive damages under the California Elder Abuse Act, disgorgement of commissions, and attorneys’ fees. The case involved claims of breach of fiduciary duty, fraud, unauthorized trading, and failure to supervise.
Chuck A. Roberts — FINRA Industry Bar (July 2025). FINRA permanently barred former Stifel Nicolaus broker Chuck Roberts after he refused to appear for testimony in connection with customer complaints about his structured note recommendations. Roberts generated approximately $61.4 million in commissions selling $3.7 billion in structured notes. As of late 2025, Stifel’s total liability from Roberts-related structured note arbitration awards and settlements has reached approximately $195 million, with more than 20 additional claims pending.
The SEC’s FY 2026 Examination Priorities, published in November 2025, explicitly list structured products as an area of heightened focus for broker-dealer Regulation Best Interest examinations. FINRA’s 2026 Annual Regulatory Oversight Report reinforces the same emphasis on complex product supervision.
What Should You Do If You Lost Money on Range Accrual Notes?
Investors who suffered losses from range accrual or steepener notes may have legal claims against the broker and firm that recommended the investment. Most brokerage account agreements include mandatory arbitration clauses, meaning claims are filed through FINRA arbitration rather than court—but investors can and do recover substantial amounts through this process.
Common legal bases for structured product claims include unsuitable recommendation, misrepresentation or omission of material risks, failure to supervise, breach of fiduciary duty, and negligence. The specific theory depends on the facts: whether the product matched your risk tolerance, whether the broker explained how the note performs during a yield curve inversion, and whether the firm maintained adequate compliance procedures for complex products.
Time limits apply. FINRA’s eligibility rule generally requires claims to be filed within six years of the event giving rise to the dispute. State statutes of limitation may impose shorter deadlines. If you believe your broker recommended a range accrual or steepener note that was unsuitable for your financial situation, you should consult a securities attorney promptly.
Talk to an Investment Fraud Attorney About Your Range Accrual Note Losses
If you lost money on range accrual or steepener notes due to a broker’s unsuitable recommendation, misrepresentation, or failure to disclose material risks, you may have a viable claim to recover those losses.
Attorney Robert Wayne Pearce has over 45 years of experience representing investors in FINRA arbitration and securities litigation. Under his leadership, the Law Offices of Robert Wayne Pearce, P.A. has recovered more than $175 million for clients nationwide in cases involving structured products, stockbroker fraud, and investment misconduct—including numerous multi-million dollar recoveries in complex structured product and overconcentration cases.
Call (800) 732-2889 today for a free consultation. There is no cost to discuss your situation and determine whether you have a claim worth pursuing. The sooner you act, the stronger your position—time limits on filing FINRA arbitration claims can work against investors who delay.
Frequently Asked Questions
What Is the Difference Between a Range Accrual Note and a Steepener Note?
A range accrual note pays interest based on how many days a reference rate stays within a specified range—the reference rate can be an interest rate, equity index, or currency pair. A steepener note is a specific type of range accrual or structured note that ties its coupon to the spread between long-term and short-term interest rates, paying more when the yield curve is steep. All steepener notes depend on interest rate spreads, but range accrual notes can be linked to a wider variety of underlying references.
Are Range Accrual Notes FDIC Insured?
No. Range accrual notes are unsecured debt obligations of the issuing bank, not deposits. They are not insured by the FDIC, SIPC, or any government agency. If the issuing bank fails, investors rank as general unsecured creditors and may recover only a fraction of their principal, or nothing at all, regardless of the reference rate’s performance.
What Happens to My Steepener Note If the Yield Curve Inverts Again?
If the yield curve inverts, the spread between long-term and short-term rates turns negative, and your steepener note’s coupon formula will produce zero income. Because most steepener notes include a 0% floor, you will not owe money—but you will receive no income for as long as the inversion lasts. During the 2022–2024 inversion, steepener note investors received zero coupons for approximately 25 months. Your principal remains at risk of mark-to-market losses if you attempt to sell before maturity.
Can I Sell My Range Accrual Note Before Maturity?
You can attempt to sell, but there is no guaranteed secondary market for range accrual notes. The only buyer may be the issuer’s affiliate, and the bid price typically reflects embedded costs plus a further liquidity discount. Selling early often locks in losses even when the underlying reference rate has not moved against you. The SEC has warned investors to be prepared to hold structured notes to maturity.
How Long Do I Have to File a FINRA Claim for Steepener Note Losses?
FINRA’s eligibility rule requires that arbitration claims be filed within six years of the event giving rise to the dispute. However, state statutes of limitation may impose shorter deadlines depending on the legal theory and jurisdiction. The clock typically starts when you knew or should have known about the losses or misconduct. Consulting a securities attorney early preserves the widest range of legal options.
Can My Broker Be Held Liable for Overconcentrating My Portfolio in Structured Notes?
Yes. FINRA suitability rules and Regulation Best Interest require that recommendations be appropriate not only at the individual product level but also in the context of your entire portfolio. J.P. Morgan was fined by FINRA after a broker pushed a customer’s structured note concentration from 14% to 43% of liquid net worth, exceeding the firm’s 15% guideline. Claims based on overconcentration in structured products have resulted in multi-million dollar arbitration awards and settlements.
