Sales of structured notes have increased dramatically in recent years. These products can provide certain limited benefits but also present hidden risks that can cause significant monetary losses.
If your broker recommended an unsuitable structured note or failed to disclose the investment’s potential risks, you might have grounds to take legal action. The structured notes claim lawyers of Erez Law, PLLC can investigate your claim and pursue compensation and accountability for your losses. Contact us today to discuss the details of your situation in a free case review.
What Is a Structured Note Investment?
Structured products are highly complex debt securities with an embedded derivative component linked to the performance of an underlying reference asset typically an individual stock, index, or basket of stocks or indices.
Structured notes are a type of hybrid financial security featuring two key components:
- Bond component
- Derivative component.
This combination integrates elements of both debt assets and investment assets into a single instrument.
- A bond is a fixed loan to a government, corporation, or other entity that the lender must repay with interest. In a structured note, the bond component represents the obligation of the issuer to pay the investor according to the terms of the structured note.
- A derivative is a financial contract that increases or decreases in value based on the performance of some underlying asset, such as a stock, index, or basket of stocks. In a structured note, the embedded derivative component boosts your earning potential by providing an avenue for exposure to a given asset class.
- Structured notes are debt obligations of the issuer, who are typically investment banks, financial institutions, or broker-dealers. While they are registered with the Securities and Exchange Commission (SEC), structured notes do not trade on an exchange and are not usually liquid investments.
The hybrid nature of a structured note offers a degree of flexibility that few other financial products have. The returns on structured notes can vary widely depending on the types and performances of the underlying stocks and derivatives. But like most financial products, structured notes can be highly risky. They are also complex and confusing to many investors, creating an environment ripe for exploitation.
Structured notes are unsuitable for many investors. If you suffered losses because your broker recommended a structured note that didn’t align with your investment priorities, you might have grounds for a claim against them. An experienced structured product lawyer can review your claim.
Risks Associated with Structured Notes
The uncertainty of a structured note comes from its derivative component, which is inherently complex and volatile, even before it is embedded in another financial product. Only seasoned and knowledgeable investors should purchase structured notes because of the following associated risks:
- Expected payoffs are hard to predict – A structured note contains a debt instrument and a derivative instrument. Investors need specific knowledge of both types of instruments to understand how the structured note could perform.
- Low liquidity is a common issue – Due to the complex and specialized nature of structured notes, few structured notes are listed on securities exchanges. Also, there is not much of a secondary market for their trade. Once a financial institution issues a structured note, it is difficult to buy or sell before maturity.
- Some structured notes lack principal protection – Many structured notes do not protect the investor’s principal. Without this critical safeguard, an investor could lose some or all of their principal if the bond asset does not perform as planned.
- “Daily pricing” figures are often misleading – Many brokers send investors “daily pricing” information about structured notes on monthly statements. Because structured notes rarely trade, these prices are usually misleading estimates that do not reflect the structured note’s actual market value.
- The likelihood of default is greater – A structured note is essentially a debt obligation on behalf of the issuing financial institution. As a result, there is a risk that the investment bank that issued the structured note could default on its debt, erasing the value of the investment.
Broker Obligations Concerning Structured Notes
Structured notes are convoluted and risky, but they can earn investment brokers substantial commissions. A desire for high commissions and disregard for upholding their fiduciary duty can lead to improper recommendations from investors. To prevent brokers from taking advantage of everyday investors, the Financial Industry Regulatory Authority (FINRA) provides the following guidance for broker sales of structured products:
- Brokers must receive training to understand the risk/reward potential of structured products before selling them to investors.
- Brokers must present a fair and balanced picture of the potential advantages and disadvantages of structured products.
- Brokers must perform a reasonable basis suitability analysis to determine whether a structured product is suitable for some investors before recommending it.
- Brokers must perform a customer-specific suitability analysis to determine whether a structured product is suitable for a particular customer before selling it.
- Brokers must follow written supervisory procedures to ensure their sales of structured products satisfy relevant financial laws.
Suitability and Structured Notes
Suitability is the primary standard in the securities industry. Brokers have an obligation to thoroughly discuss an investor’s goals and determine their risk aversion. Individuals who need to preserve their principal to meet their investment needs may not wish to invest in structured notes, which can be highly speculative, volatile, and unsuitable investments.
Due to their complexity, FINRA requires brokerage firms to take additional steps to ensure structured notes are suitable to their specific investors. FINRA states in Notice to Members 05-59 that brokerage firms must specifically approve clients for structured products or develop similar investor protection safeguards.
Brokerage firms must ensure that structured products are only sold to investors where the risk associated with these products is appropriate. They must be able to articulate why their investors are so qualified to purchase such structured products. Failing to meet these standards can put brokerage firms at risk for claims against them.
When Can Investors File Claims to Recover Structured Note Losses?
When the underlying stocks or indices of a structured note sustain large losses, investors can suffer substantial losses. You could be able to file a claim to recover your losses if you lost all or part of your structured note investment because:
- Your broker provided unreliable or misleading information about the investment.
- Your broker failed to adequately explain the complex terms, trigger thresholds, or other vital information about these complex investment products.
- Your broker failed to disclose the significant risks associated with structured notes.
- A structured note was not suitable for your portfolio, given your investment goals.
- Your broker recommended the structured product due to a conflict of interest.
- Your broker recommended structured notes to charge massive commissions on the sales.
- Your broker recommended a structured product that was fundamentally unsound.
- Your broker developed an unsuitable investment strategy that involved high risks with little diversity.
- Your broker failed to obtain your authorization before purchasing structured products or participating in unauthorized trading.
How Can You Recover Your Structured Note Investment Losses?
Recovering financial losses from a structured note investment is challenging, but a knowledgeable investment lawyer can help you demand a fair recovery.
The structured product lawyers of Erez Law, PLLC are devoted to protecting the rights of investors nationwide. Our team can investigate the circumstances to determine if you were the victim of broker misconduct, fight to hold the untrustworthy broker or firm accountable, and pursue fair compensation for your losses.
Contact Our Nationwide Structured Product Investment Lawyer Today
If you suffered financial losses because your broker recommended an unsuitable structured note or failed to adequately disclose the risks of a structured note, you may be able to recover compensation through a legal claim against them. Contact the structured products lawyers at Erez Law, PLLC today to explore your options in a free initial consultation.