Structured Notes / Structured Bonds

Structured products are high-risk complex investment products that combine a medium term (1 to 5 years) unsecured bond with options on one or more underlying stocks or stock market indexes. They are created and issued by many of the larger investment banks and can best be described as a “heads we win, tails you lose” product. The investor who buys the note takes on serious downside risk, but can only benefit from limited upside.

Unsuitable concentrations of customer accounts in these high-risk complex products can lead to severe losses of principal value. Despite the high interest rates promoted by these products, customer portfolios may perform much worse than a suitable diversified portfolio with much lower risk. Customers from across the country with serious losses from structured products should consult with our Virginia Securities Fraud Lawyers.

Types of Structured Notes and Structured Bonds

One type of common structured bond provides a quarterly interest coupon payment that is contingent on the performance of one or more underlying stocks. The interest payment will be made if the underlying stock or stocks trade above a certain threshold. If the stock (or one of the stocks) is below the threshold on the quarterly interest payment date, the interest payment is not paid. The payment at maturity of the note is also contingent on the trading value of the underlying stock or stocks. If the stock or stocks are all above the threshold level, the investor receives the full principal amount at maturity. However, if the underlying stock or one of the underlying stocks is below the threshold, the investor receives only a portion of his principal based on the worst performing of the underlying stocks.

Many of the structured notes sold are autocallable, meaning that they can automatically mature early if the underlying stock or index reaches or exceeds a specified level on predetermined observation dates.

A steepener structured note is another complex product that allows investors to bet on the difference between long-term and short-term interest rates, profiting if the yield curve steepens. These notes, which may use leverage, typically pay an initial high “teaser” interest rate, but future returns depend on the shape of the yield curve. If the curve flattens, interest payments can drop sharply or result in losses.

Risks of Structured Notes and Structured Bonds

Structured notes are inherently risky and problematic for retail investors, and they are far more complex than traditional investments. Complex mathematical modeling is required to determine whether the contingent interest rate paid by the note provides a fair return for the risks of non-payment of interest and potential reduced principal recovery at maturity.

Financial institutions that sell structured bonds typically set the price that they charge for the bond higher than the underlying value of the underlying components, and they may set the interest rate too low to compensate for the risk of the investment. For example, the issuer bank could value the bond at the time of sale at only $890.00, yet the bonds would then be sold for $1,000.00 each. This would mean that the customer lost 11% of their investment value on the purchase date.

Typically, the upside on structured notes is capped, but the downside is not. Investors can lose more than they can gain. With direct investments in stocks, investors could possibly lose all their money, although this risk can be reduced by investing in a diversified fund or portfolio. However, stocks can also provide very high returns of 100% or more. With structured notes, investors can lose all their money, but they have their potential investment returns capped.

Another serious risk of structured notes is the lack of liquidity. The ability to trade or sell structured notes in the secondary market is limited as they are not listed on an exchange.

Our securities fraud lawyers have decades of experience recovering losses for customers who were fraudulently sold unsuitable and highly risky products, including structured notes and structured bonds.

Brokerage Firms that Sell Structured Products

An analysis of publicly available data from FINRA’s Brokercheck Reports reveals that the following securities firms have reported that their financial advisor(s) have been subject to customer complaints relating to structured notes or structured bonds:

• Stifel Nicolaus & Co
• Raymond James Financial Services
• LPL Financial Corporation
• Cetera Investment Advisors
• Avantax Advisory Services
• UBS Financial Services
• Wells Fargo Advisors
• Truist Advisory Services
• Key Investment Services
• Morgan Stanley & Co.
• RBC Capital Markets
• Aegis Capital
• Hilltop Securities
• Fifth Third Securities
• Merrill Lynch Pierce Fenner & Smith
• Independent Financial Group
• PNC Investments

Brokerage Firms that Issue Structured Products

Many of the largest investment banks in the U.S. and the world are issuers of structured bonds and notes, including the following:

• Citigroup
• Credit Suisse
• Bank of Montreal
• Goldman Sachs
• HSBC
• JP Morgan Chase
• Morgan Stanley
• RBC (Royal Bank of Canada)
• Societe Generale
• UBS

Duties of Financial Advisors Who Recommend Structured Products

FINRA financial advisors have strict duties to only recommend securities and strategies to their customers that are in their customers’ best interest. This duty, under SEC Regulation Best Interest (Reg BI), encompasses the duty to know and understand the product and its risks before recommending it, to only recommend it if the associated benefits and risks are suitable for and in the best interest of the customer, to consider the customer’s overall portfolio and concentration in structured products when making the recommendation, and to ensure that conflicts of interest are disclosed, minimized, and/or eliminated.

Similarly, registered investment advisor representatives also have fiduciary duties to ensure that the recommendations are suitable, and in the customer’s best interest.

If you have suffered realized or unrealized losses from recommended structured notes or bonds, and wish to discuss your situation with an investment fraud lawyer, please contact Scott Greco for a free consultation regarding your potential case. Our Virginia Securities Fraud Lawyers have represented customers from around the country against their financial advisors for over twenty-five years.