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Archive for the ‘Structured Products’ Category

Concentrated Position Risk Drawing Regulatory Scrutiny

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that “maintained customer accounts that were concentrated in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trust (“REITs”), which were unsuitable for customers and resulted in significant customer losses.”

A concentrated account is commonly considered to be an account which contains a significant percentage of its assets in one product, type of product or sector which exposes the account to excessive amounts of risk – especially during periods of extreme volatility as the markets have recently experienced in greater frequency.

In particular, FINRA noted that “some registered representatives recommended structured notes or sector-specific investment strategies to customers who may not have had the sophistication to understand their features and without considering the customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors.”

Some of the “recommendations involved illiquid securities with limited price transparency, which made it difficult for investors to know the true value of their investment and led them to believe that their investments would not fluctuate in value. In some instances, firms did not have procedures or systems reasonably designed to identify and supervise the concentration of such products in customers’ accounts.”

If you are an individual or institutional investor who has any concerns about your concentrated investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Auto-Callable Structured Products – the Wall Street House Always Seems to Win

The Wall Street Journal, on September 12, 2018 (“FANG Stock Play Can Fall Short”), noted that investors looking to reap the gains of highflying technology stocks while avoiding risk – through the purchase of “auto-callable” structured note products – are finding they can’t do both.

These structured notes “are often sold to mom-and-pop investors seeking higher-yielding alternatives to government debt, which is reliably safe. Offering documents say that buyers can earn fixed payouts of as much as 25% of the purchase price annually without taking on the risk of outright common-share ownership. Yet many of these FANG-linked notes fail to produce returns anywhere near that stated range, according to an analysis of securities filings by The Wall Street Journal. Many times, the upfront fees that banks collected were higher than the total returns earned by investors.”

“That is partly because the notes – dubbed ‘auto-callable’ because a rise in the stock price contractually triggers their redemption – are often redeemed in less than a year, and sometimes in as little as a month. In many cases, the auto-callable provision leads investors to earn scant returns and receive their money back long before the stated term of the investment.”

As noted in the article, auto-callable notes “are unlike common shares, which offer purchasers unlimited potential gains as well as the risk of total loss. They are also unlike U.S. Treasuries, which pay out periodic ‘coupons’ and entitle holders to full repayment at maturity. Instead, the notes offer gains up to a certain, specified threshold and protect against only certain, specified equity losses. Typically, if the linked stock or basket of stocks trades below a designated barrier – say, 75% of its initial value – when the notes mature, investors can lose a share of their principal on par with losses on the stock or basket.”

The Wall Street Journal specifically notes that Citigroup Inc., UBS Group AG and Royal Bank of Canada are among the banks this year that have issued more than $1 billion of auto-callable structured notes that are linked to one or more of the four FANG stocks: Facebook, Amazon, Netflix and Google parent Alphabet.

So how does the Wall Street house win with these investments? Consider just the following 2 examples that were cited in this article:

“When Citigroup sold $16.3 million of auto-callable notes tied to Amazon.com shares in mid-February, the firm advertised a 10% potential annual coupon for three years. Three months later, Amazon shares were up more than 20% – but the note was called, meaning that investors who purchased it received a total payout of 2.5%” while Citigroup “collected 3.5% in fees.”

Similarly, “in March, UBS issued a $150,000 note tied to Netflix. It paid 20.58% annually as long as shares of Netflix weren’t above the effective purchase price on monthly review dates. After one month, the stock was up 5.9%. The note was called, paying a coupon of 1.7% of the purchase price” while UBS reportedly “collected 2.7% in fees.”

If you are an individual or institutional investor who has any concerns about your auto-callable or structured product investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Energy Related Bonds & Structured Notes – A Potential Wolf in Sheep’s Clothing?

As noted in a February 5, 2016 article in The Wall Street Journal (“The Oil Rout’s Surprise Victims”), the epic collapse in the price of oil, from more than $100 per barrel less than two years ago to below $30 last week, has “crushed investors in the futures market, energy partnerships, high-yield corporate bonds and the shares of oil and gas companies.”

But there is another sector of the energy market – short term bonds and structured notes issued by major investment firms whose returns are linked to the price of oil or other energy-related assets – that could also be decimated in the coming months unless there is a significant recovery in oil prices.

These securities, which have been sold to wealthy families and individual investors who want to limit the risk or amplify the return of more-conventional investments, often carry such alluring nicknames as “Phoenix,” “Plus,” “Enhanced Return” or “Accelerated Return.” They typically mature in two years or less and pay commissions of about 2% to the brokerages that sell them which has included units of Bank of America, Citigroup, Credit Suisse, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and UBS.

Unfortunately, they use intricate combinations of options contracts to skew the payoffs from changes in energy prices: investors can make a lot of money if oil goes up a little, and they can lose much or all of their money if it goes down a lot. At current prices, most of these securities are underwater and there will have to be a significant increase in the price of oil (estimated at 50% to 100%) for them to return to their original value.

There isn’t any significant secondary trading in most of these securities, meaning that the issuing bank may often be the only buyer which, more often than not, does not benefit the investors who own them.

If you are an individual or institutional investor who has any concerns about your investment in any energy related bonds or structured notes, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Many equity structured products linked to Apple may now be underwater

Last year, at least 450 new structured products were linked to Apple, according to SLCG. Three-quarters of them were issued when the stock was at least $550. The shares closed Friday at $439.88, down $60 for the week.

As a result, the value of Apple-linked products suffered a one-week drop of more than 15%, estimates Craig McCann, founder of SLCG. “The vast majority of them are now underwater,” he says.

Many investors will get far less than they expected. Losses exceed 25% on more than 100 of last year’s Apple-related products, SLCG estimates.

Investors should have asked this question before buying: Why would banks offer 10% interest when most one-year debt was paying about 1%?

The answer: Investment banks got something else in return. In plain English, the Apple-linked products gave firms a cheap way of hedging or betting that Apple’s stock would go down. Now, in many cases, they can dump the fallen stock on conservative bond investors who might not want it and, in turn, will sell it again.

Structured CDs examined by FINRA

FINRA is examining sales of certificates of deposit tied to derivatives after banks sold a record number of the investments last year.

The industry-backed regulator wants to make sure the so- called structured CDs, where principal is protected by the Federal Deposit Insurance Corp., are properly understood by investors given their increasing complexity and lengthening maturities, said Maria Rabinovich, a lawyer in Finra’s risk division. The watchdog issued an alert on complex products in January, without referring to the CDs. The notice avoided defining what constitutes such products, while outlining a few examples, such as those where information is not readily available about the assets they’re tied to, and so-called “steepeners,” which typically bet on the shape of the Treasury yield curve.

Demand for derivative-linked certificates of deposit has risen as the Fed holds rates below 0.25 percent for the third straight year. Yields on five-year, fixed- rate CDs have declined to 1.55 percent, the lowest level since at least June 1998, according to Bankrate.com.

Banks sold a record 1,271 of the investments in the U.S. last year, according to StructuredRetailProducts.com, a database used by the industry. Statistics on total volume are incomplete because banks aren’t required to register issuance with the Securities and Exchange Commission, and the FDIC doesn’t track the products separately.

Lehman Brothers structured products

Structured products in Asia have slunk into the shadows ever since Lehman Brothers introduced the words “counterparty risk” to thousands of retail investors.

But the investment class still offers value to those who know how to use it, while those selling the products have embraced simplicity and education in an effort to improve understanding among investors.

Structured products – synthetic investments that give holders exposure to an underlying asset or strategy without having to actually own the underlyings – fell into disfavour in 2008 when Lehman Brothers, which had been one of the major issuers of structured products, filed for bankruptcy.

In an instant, structured notes that had been backed by Lehman Brothers’ credit lost value, even if the notes had offered principal protection.

Several of those products were sold to retail investors, many of whom had not understood that their principal would be at risk if Lehman went under. A number of distributors were reprimanded.

The structured products industry responded by turning back the clock, shifting away from complex structures towards simpler products. There was a much stronger push to improve investor education and an emphasis on suitability – making sure that customers are sold only products that are appropriate to them.

Sales of structured products also shifted away from retail and moved more into the realm of private banks and high net worth individuals.


Aidikoff, Uhl & Bakhtiari Investigates Bank of America Structured Products

Aidikoff, Uhl & Bakhtiari launches investigation on behalf of investors that purchased Bank of America structured investments which were represented as protecting principal. The investments the firm is investigating includes:

Bank of America (Basket EAGLES) Equity Appreciation Growth Linked Securities
Bank of America Return Linked Notes
Bank of America CYCLES (Capital Protected Equity Performance Linked Securities)
Bank of America EAGLES (Equity Appreciation Growth Linked Securities)
Bank of America Strategic Equity Exposure Performance Linked Securities
Bank of America Columbia Strategic Cash Portfolio

Bank of America Sells Record Number of Structured Notes

Bank of America Corp. raised $4.7 billion selling structured notes to U.S. investors through June, the most of any issuer and more than its 2009 total, as sales of the securities rose to a record pace.

Banks have sold $22 billion of structured notes to individual investors in the U.S. this year, according to data from regulatory filings compiled by Bloomberg. Sales are on pace to exceed what was a record $38 billion in 2008, according to StructuredRetailProducts.com, a database used by the industry.

The securities are created by banks, which package their own debt with derivatives to offer customized bets to investors while also raising money. Last year, Bank of America sold $4.1 billion of the products, second to Barclays’ $4.5 billion in sales, according to StructuredRetailProducts.com.

FSA Investigates Lehman Structured Product Sales

The FSA and Financial Ombudsman Service said in a press release yeasterday they have jointly concluded that Lehman Brothers’ insolvency raises issues in the UK structured products market.

The release said: “As a result, while the Ombudsman has been investigating a number of individual complaints, the FSA has been actively looking at the wider issues raised in this market.”

The FSA and Ombudsman have agreed that the regulatory options available to the FSA would be one way of reducing consumer detriment, as well as potentially being able to deal with the concerns of more consumers than those who have complained to the Ombudsman.

Therefore, they have agreed that the FSA will now consider issues relating to Lehman-backed structured products under the “wider implications” process, in order to allow the FSA to explore all options to achieve the best outcome for consumers.

Many in the industry concede clients have not been well served by structured product providers, particularly in the retail market where fees are notoriously high. “As much as 80% of the structured products world doesn’t deliver good value to investors,” says Chris Taylor, chief executive of Blue Sky Asset Management, speaking to Wealth Bulletin last year.

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