Written by The White Law Group• August 2, 2022• 12:25 pm• Blog, Securities Fraud Articles

Variable Interest Rate Structured Products – Securities Fraud Attorneys –

Variable Interest Rate Structured Products – High Risk Investments

Recovery Options for Investors in Variable Interest Rate Structured Products

Structured Products are a mix of traditional financial instruments, i.e., stocks and bonds with one or more elements that utilize derivatives; they are prepackaged investment strategies based on options, commodities, currencies, or a basket of securities, among others. Conversely, there is no single structure to Structured Products, meaning they have different rules and functions within the various packages.

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Variable Interest Rate Structured Products are complex, structured securities, typically issued by large well-known financial institutions, that offer guaranteed periodic fixed-interest rate payments, typically for one to three years. After the fixed-interest rate periods end, however, the structured products make periodic variable interest rate payments, but only if a spread exists in which the long-term Constant Maturity Swap (“CMS”) rate is greater than the short-term CMS rate and certain reference securities indexes, such as the S&P 500 and/or the Russell 2000 stock indexes, do not decline by more than a specified percentage.

Unfortunately, once the fixed-interest rate payment periods end, the investors are not guaranteed to receive any further interest payments from the investment. According to one of the prospectuses for a variable interest rate structured product, there can be no assurance that [investors] will receive a contingent interest payment on any interest payment date and that “the securities are not a suitable investment for investors who require regular fixed income payments, since the contingent interest payments are variable and may be zero.”

Variable Interest Rate Structured Products are considered “principal-at-risk” securities, which means that the Customers can lose some or all of their invested principal if the investments’ respective reference securities indexes fail to perform within pre-determined ranges at maturity.

For example, preliminary prospectuses for a few of these products expressly warn that: “There is no minimum payment at maturity on the securities. Accordingly, investors may lose up to their entire initial investment in the securities.”

Additionally, the variable rate structured products typically have maturity periods of fifteen years or more and are not certain to trade in a liquid secondary market. For example, a preliminary prospectus for one variable interest rate structured product offered by Aegis Capital Corp. specifically warns, “The securities will not be listed on any securities exchange. Therefore, there may be little or no secondary market for the securities…. Even if there is a secondary market, it may not provide enough liquidity to allow you to trade or sell the securities easily…. Accordingly, you should be willing to hold your securities to maturity.”

The SEC has apparently been investigating unsuitable recommendations of structured products.

According to a press release last week, the regualtor reportedly charged Aegis Capital Corp., and two reps in connection with unsuitable recommendations of structured products to customers. See: SEC Charges Aegis Capital Corp. and two Reps with Unsuitable Recommendations…

The SEC reportedly found that fourteen Aegis brokers recommended Variable Rate Structured Products (VRSPs) to forty-eight customers for whom the VRSPs were unsuitable in light of the customers’ financial situation and needs, as reflected by their risk tolerance, investment objectives, age, investment experience, liquidity needs, and investment time horizon.

The SEC order finds that Aegis allegedly failed to reasonably supervise its registered representatives. Aegis agreed to a censure, to cease and desist from future violations of the charged provisions, and to pay disgorgement plus prejudgment interest of $220,865 and a civil penalty of $2.3 million, without admitting or denying the SEC’s findings.

Potential Lawsuits to Recover Financial Losses

When brokers and registered investment advisors violate securities laws, such as making unsuitable investment recommendations or unauthorized trades, the brokerage firm they are working with may be liable for investment losses through FINRA Arbitration. Brokerage firms that fail to monitor the business activities of their employees may be liable for investment losses due to negligent supervision for the misconduct of their employees.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington. We represent investors in all 50 states including Florida. Our attorneys have recovered millions of dollars from many brokerage firms in the past.