Risks to Consider When Investing in Structured Notes/Products
As an investor, you must be fully aware of the associated risks and whether structured notes fit within your investment parameters.
Robert Pearce, Attorney at the Law Offices of Robert Wayne Pearce, P.A. will explain these risks to you. He is a highly experienced investment fraud lawyer who has successfully handled many structured note cases and other complex securities and investment law matters.
What are structured products? More detail here
Features of a particular structured product, dependent upon the type of products issued, that you as an investor should consider when determining its general suitability:
Structured Product Credit Risk:
Structured products are unsecured debt obligations of the issuer. As a result, they are subject to the risk of default by the issuer. The creditworthiness of the issuer will affect its ability to pay interest and repay principal. The financial condition and credit rating of the issuer are, therefore, important considerations. The credit rating, if any, pertains to the issuer and is not indicative of the market risk of the structured product or underlying asset. If a structured issue provides principal protection or a minimum return, any such guarantee rests on the credit quality of the issuer. Those issued by banks in the forms of CDs may also provide FDIC insurance with standard coverage limitations.
Structured Product Liquidity Risk:
Structured products are generally not listed on an exchange or may be thinly traded. As a result, there may be a limited secondary market for these products, making it difficult for investors to sell them prior to maturity. Investors who need to sell structured products prior to maturity are likely to receive less than the amount they invested. Therefore, structured products with longer maturities are subject to greater liquidity risk. The price that someone is willing to pay for structured products in a secondary sale will be influenced by market forces and other factors that are hard to predict. Sometimes, a broker-dealer affiliate of the issuer may make a market for the resale of structured products prior to maturity but the price it is willing to pay will be adversely affected by the commissions paid by the issuer on the initial sale of the structured products and the issuer’s hedging costs. Some structured products have lock-up periods prohibiting their sale during such periods. Persons who invest in structured products should have the financial means to hold them until maturity.
Structured Product Pricing Risk:
Structured products are difficult to price since their value is tied to an underlying asset or basket of assets and there typically is no established trading market for structured products from which to determine a price.
Structured Product Income Risk:
Structured products may not pay interest (or may not pay interest in regular amounts or at regular intervals), so they are not appropriate for investors looking for current income. Because the return paid on structured products at maturity is tied to the performance of a basket of assets and will be variable, it is possible that the return may be zero or significantly less than what investors could have earned on an ordinary, interest-bearing debt security. The return on structured products, if any, is subject to market and other risks related to the underlying assets.
Structured Product Complexity and Derivatives Risk:
Structured products typically use leverage, options, futures, swaps and other derivatives, which involve special risks and additional complexity.
Structured Product Pay-Out Structure Risk:
Some structured products impose limits, caps and barriers that affect their return potential. With barriers, a structured product may not offer any return if a barrier is broken or breached during the term of the structured product. Conversely, some structured products may not offer any return unless certain thresholds are achieved. Some structured products impose maximum return limits so even if the underlying assets generate a return greater than the stated limit or cap investors do not realize that excess return. Structured products also have participation rates that describe an investor’s share in the return of the underlying assets. Participation rates below 100% mean that the investor will realize a return that is less than the return on the underlying assets.
Structured Product Volatility and Historical Performance of Underlying Asset(s):
Past performance of an underlying asset class is not indicative of the profit and loss potential on any particular structured product. The value of the underlying assets can experience significant periods of fluctuation and prolonged periods of underperformance.
Structured Product Costs and Fees:
Costs and fees associated with the purchase of a structured product vary.
Structured Product Tax Considerations:
Structured products may be considered “contingent payment debt instruments” for federal income tax purposes. This means that investors will have to pay taxes each year on imputed annual income based on a comparable yield shown in the final term sheet or prospectus supplement. In addition, any gain recognized upon the sale or exchange, or at maturity, of these products will generally be treated as ordinary income. This especially pertains to principal protected issues. Please consult your tax advisor for guidance.
Additional vulnerabilities may include loss of principal and the possibility that at maturity the investor will own the underlying asset at a depressed price. Interest rates and time remaining until maturity are all factors that may affect the value of the structured product. As with any investment selection, structured products should be purchased as a limited percentage of your portfolio and overall investable assets.
Investment Losses? We Can Help
Discuss your legal options with an attorney at The Law Offices of Robert Wayne Pearce, P.A.
or, give us a ring at (800) 732-2889.
RISKS OF PRINCIPAL PROTECTED STRUCTURED PRODUCTS
Many investors, especially those more risk-averse, would like to participate in the potential profits of a particular asset class, while at the same time limit their exposure to a market downturn.
Principal protected structured investments can allow investors to achieve both objectives. Instead of paying a fixed rate of interest, a principal protected structured product can provide a return at maturity based on the appreciation of an underlying asset or basket of assets, such as a U.S. or international equity market index, one or more commodities or various other financial benchmarks.
While the interest the investor will receive is uncertain, and could be zero, the return of the initial investment amount at maturity is assured, subject to the credit quality of the issuer, regardless of the performance of the underlying asset(s).
THE BASIC STRUCTURE OF PRINCIPAL PROTECTION
Interest on principal protected structured products is calculated based on a formula which may include some or all of the factors discussed below.
Value Date: Interest computations begin with the percentage change in the value of the underlying asset. It is the change between the “initial value date” and the “final value date” specified for the particular offering. The percentage change is the difference in the final value and the initial value divided by the initial value. The initial value date is usually the date of issuance while the final value is typically calculated just prior to the maturity date to allow for the interest payable at maturity to be available on the maturity date.
Participation Rates: The participation rate dictates the extent to which an investor will participate in the underlying asset’s gain. This is applied to the percentage change in the underlying asset’s value. A rate of 100% would allow the investor a return equal to the percent change in value of the underlying assets. Certain products may offer participation rates of less or more than 100%.
Minimum or Maximum Interest Amount; Barriers: In this case, the particular product will have a specified minimum and/or maximum interest, or cap, amount that may be paid at maturity. At maturity, if the interest calculated is less than the stated minimum, the interest amount paid to the investor will be the minimum interest amount. If the interest calculation results in a value greater than the maximum for the investment, only the maximum interest will be paid. If the value of the underlying asset decreases, the investor’s initial investment, or principal amount, must be returned in full at maturity. A structured product with a barrier typically means that if the change in the value of the underlying asset (positive for an upper barrier and negative for a lower barrier) exceeds a certain percentage, the investor realizes a limited or no return on his investment.
Callable Structures: Certain products may have call features allowing them to be redeemed by the issuer prior to maturity. The call is at the option of the issuer only. The call features will be disclosed prior to issuance and are expressed as a percentage of the initial investment amount. The issuer would be most likely to call the investment when the value is greater than the call price. The value of the investment can be based on a variety of unpredictable factors including the current value of the underlying asset, time remaining to maturity, volatility and interest rates.
WHO ISSUES PRINCIPAL PROTECTED STRUCTURED PRODUCTS?
Domestic and foreign banks along with corporations issue principal protected structured products. Certain structured products issued by banks may (but need not) be structured as certificates of deposit or other types of deposits and thus may be entitled to FDIC insurance protection subject to applicable limits.
IF YOU RUN INTO A PROBLEM
If you have a complaint concerning a securities professional and a structured product investment, do not contact the brokerage firm management or compliance department unless you want to assist them in their defense of your claim.
Structured product investments can be misrepresented, mismanaged and unsuitable investments offered and sold in violation of federal and state securities laws or in breach of a stockbroker fiduciary duty to customers.
Those brokers can be liable for their negligence and failure to abide by securities and industry rules and regulations in offering structured product investments.
At the Law Offices of Robert Wayne Pearce, P.A., we know the nature, mechanics and risks of structured product investments.
Please contact us for a free consultation if you believe you have been harmed by a broker misconduct in connection with a structured product investment.
Please read through this page where we discuss how we represent investors who have suffered losses due to structured products and complex derivatives, or call us at the number below.
FREE CONSULTATION WITH ATTORNEYS WHO HAVE STRUCTURED NOTES AND COMPLEX INVESTMENT FRAUD CASES
Contact The Law Offices of Robert Wayne Pearce, P.A to discuss your structured note/products fraud or misrepresentation claim. The firm can be reached by phone at 800-732-2889 or via e-mail.
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