Overview of Structured Note Products – Basics, Risks, Offerings, Litigation Options
Structured Notes are a Wall Street invention. There is a lot to know about these products but here are some basics.
What are Structured Notes?
Structured notes are securities issued by financial institutions (Citigroup, Morgan Stanley, Deutsche Bank, JP Morgan Chase, RBC, etc) whose returns are based on, among other things, equity indexes, a single equity security, a basket of securities. The return on an investment in a structured note is “linked” to the performance of a specific referenced asset or index. Structured notes have a fixed maturity and include two components – a bond component and an embedded derivative. Financial institutions typically design and issue structured notes, and broker-dealers, often for a large commission, sell them to individual investors.
Some common types of structured notes sold to individual investors include: principal protected notes, reverse convertible notes, enhanced participation or leveraged notes, credit linked notes, constant proportion debt obligations, constant proportion portfolio insurance, FX and commodity linked notes, market linked notes, and hybrid notes that combine multiple characteristics.
Risks and Other Considerations with Structured Notes. There are a number of risks to structured products but here are a few:
These products are extremely complicated and typically only suitable for very sophisticated investors.
Despite advisors often selling structured notes as having downside protection, there are usually limits to that downside and in the wrong market conditions losses can still be extraordinary.
Issuance price and note value
The price you will pay for a structured note at issuance will likely be higher than the fair value of the structured note on the date of issuance.
Your ability to trade or sell structured notes in a secondary market is often very limited as structured notes (other than exchange-traded notes known as ETNs) are not listed for trading on security exchanges. As a result, the only potential buyer for your structured note may be the issuing financial institution’s broker-dealer affiliate or the broker-dealer distributor of the structured note.
Structured notes may have complicated payoff structures that can make it difficult for you to accurately assess their value, risk and potential for growth through the term of the structured note.
Some structured notes provide a minimum payoff of the principal invested plus an additional payoff to you based on multiplying any increase in the reference asset or index by a fixed percentage. This percentage is often called the participation rate. A participation rate determines how much of the increase in the reference asset or index will be paid to investors of the structured note. Essentially this means that sometimes while the downside is large the upside is limited.
Capped maximum returns
Some structured notes may provide payments linked to a reference asset or index with a leveraged or enhanced participation rate, but only up to a capped, maximum amount.
If the reference asset or index falls below a pre-specified level during the term of the note, you may lose some or all of your principal investment at maturity and also could lose coupon payments scheduled throughout the term of the note.
Structured notes are unsecured debt obligations of the issuer, meaning that the issuer is obligated to make payments on the notes as promised. These promises, including any principal protection, are only as good as the financial health of the structured note issuer. This risk would be equitable to the risk that materialized with the Lehman Brothers Principal Protected Notes. The principal protection required Lehman Brothers to remain in business. Once they went out of business, the principal protection was gone.
Some structured notes have “call provisions” that allow the issuer, at its sole discretion, to redeem the note before it matures at a price that may be above, below or equal to the face value of the structured note. This is a particular risk during volatile markets.
The tax treatment of structured notes is complicated and in some cases uncertain.
Securities Investigation involving Structured Note Products
The White Law Group is investigating the liability that brokerage firms may have for recommending complex, often extremely high-risk, structured callable note equity linked investments. With the market in turmoil, many investors who purchased such investments believing they provided downside protection or were akin to bonds because of the dividend component are instead finding that these products can indeed suffer enormous losses.
Brokers often pitch structured products, as providing “downside protection” against losses to a related index while allowing modest up side gain potential. Of course, this is only true if the value of the index doesn’t fall below a predetermined price. If the price falls below that point, the losses in structured notes can still be huge.
These products typically pay a high fee to the financial advisors that sell them.
Sometimes these structured products can have misleading names like market linked certificates of deposit (CDs).
Brokerage firms have two main duties in recommending structured callable notes linked to equity investments or indexes. First, brokerage firms are required to perform adequate due diligence on any product they recommend. Second, brokerage firms are required to ensure that all recommendations made are suitable for their client in light of the client’s age, investment experience, net worth, income, and investment objectives.
If a brokerage firm fails to do either of these things, the firm can be held responsible in a FINRA arbitration claim.
Unfortunately for investors there are literally hundreds of structured products currently being offered by financial institutions, each with their own underlying risk based on whatever they may be linked to.
The White Law Group is specifically investigating whether the following structured callable notes linked to equities, among many others, were inappropriately sold:
Citigroup AutoCallable Equity Linked Securities Linked to the Worst Performing of Amazon.com, Inc., JPMorgan Chase & Co. and Walmart Inc.
JP Morgan Chase Equity Linked Contingent Coupon Auto Callable Yield Notes Linked to Exxon Mobil
JP Morgan Chase Equity Linked Contingent Coupon Auto Callable Yield Notes
JP Morgan Chase Equity Linked Auto Callable Contingent Interest Notes
National Bank (NBC) Auto Callable Contingent Income Note Securities (Maturity-Monitored Barrier) linked to the common shares of Exxon Mobil Corporation
RBC Capital Callable Contingent Coupon Barrier Notes
RBC Capital Callable Contingent Coupon Barrier Notes linked to Exxon
Morgan Stanley Market-Linked Notes
Morgan Stanley Market-Linked Deposits
Morgan Stanley Partial Principal At Risk Securities
Morgan Stanley Leveraged Performance Securities
Morgan Stanley Buffered PLUS Securities
Morgan Stanley Buffered PLUS Based on the Value of the S&P 500
Morgan Stanley Buffered Performance Leveraged Upside Securities
UBS Structured Contingent Income Auto-Callable Securities linked to the Oil & Gas Exploration & Production ETF
Credit Suisse Contingent Coupon Autocallable Yield Notes
HSBC Principal Protected Market-Linked Certificates of Deposit
Societe Generale Callable Yield Notes
Citigroup Callable Accrual Principal Protected Notes
CitiFirst Non-Callable Fixed to Float Notes
CitiFirst Coupon Barrier Autocall Notes
Deutsche Bank Worst of Issuer-Callable Notes
Deutsche Bank Callable Leveraged Steepener Notes
Deutsche Bank Principal Protected Callable Notes
Deutsche Bank Capital Guarantee Notes
Deutsche Bank Step Up Rate Step Up Notes
Wells Fargo Market Linked Notes
RBC Auto Callable Access Securities with Fixed Percentage Buffered Downside
RBC Leveraged Upside Participation to a Cap and Fixed Percentage Buffered Downside
RBC Upside Participation Equity Linked Notes
Free Consultation with a FINRA Attorney
If you suffered losses investing in an equity linked structured note and would like to discuss your litigation options, please call The White Law Group at 888-637-5510 for a free consultation.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington. For more information on the firm and its representation of investors in FINRA arbitration claims, visit www.whitesecuritieslaw.com.
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