Regulatory Bodies Cast a Wary Eye on Structured Notes

The SEC’s Office of Compliance recently issued a Risk Alert concerning lapses in brokerage supervision and compliance controls on the sale of structured products - especially structured notes - to retail investors. Several months ago the SEC also issued a broader Investor Bulletin concerning structured notes. The Financial Industry Regulatory Authority (FINRA) has also repeatedly urged investors to be careful when considering structured products.

What does all this attention to structured products mean? Well, for one thing, as the lessons we presumably learned from the 2008-9 Financial Crisis slowly fade from memory, the arrival of a raft of new, highly complex financial products have made their way into retail investors’ accounts. Together, the SEC and FINRA are warning investors and pushing back against brokerage firms over the irresponsible and unsuitable sale of structured products and notes.

What is a Structured Note?

A structured note refers to a broad category of structured securities which combine a bond with a derivative component. Like a bond, these products usually offer a full or partial return of the principal at maturity (hence the “principal protection”). These products may also be described as “capital guaranteed,” “absolute return,” “minimum return,” and so on.

What are the Risks of Structured Notes?

Because retail investors tend to hear the words “principal protection” and “absolute return” and believe that their principal is safe, they often overlook the fact that structured notes are anything but risk-free. Indeed, the riskiness of the note will be directly tied to the creditworthiness of the note’s issuer. If that issuer goes bankrupt, investors lose their money.

Liquidity risk is another issue. Because many of the assets underlying structured notes may trade little if at all on the secondary market, it may be difficult to impossible for investors to redeem their notes early.

Brokers Have a Duty to Advise Investors About Risk

The SEC and FINRA have teamed up to raise awareness about the risks of structured products. They are putting brokerages on notice that proper supervision and education is necessary if brokers are to sell their products responsibly to retail investors. And they are advising investors to beware when it comes to misleading nomenclature like “protection,” “guarantee,” and “absolute.”

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If you or someone you know has suffered financial loss due to structured notes or any other form of investment fraud or broker misconduct, please contact our experienced team of securities attorneys immediately to protect your legal rights by calling 1-855-462-3330 or by using our online contact form.