Lax & Neville LLP represents investors in litigation and arbitration against financial firms, most often brokerage firms and registered investment advisors (“RIAS”), that have recommended and sold structured products. While structured products are not formally defined under federal or state law, United States Securities and Exchange Commission Rule 434 previously defined structured products as:
securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows.
Additionally FINRA Notice to Member 05-59 defines structured products as, “securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance and/or foreign security.” Some of the most common structured products are mortgage backed securities (MBS), Collateralized Debt Obligations (CDO), Collateralized Mortgage Obligations (CMO), Principal Protected Structured Notes (PPNs), and Credit Default Swaps (CDS).
In recent years, brokerage firms and investment advisors have begun to increase their sale of these products to the retail market. These securities are designed to facilitate highly customized risk-return objectives, and essentially offer retail investors easy access to derivatives. They are typically structured by taking a traditional security, such as a conventional investment-grade bond, and replacing the usual payment features, such as the period coupons and principal, with non-traditional payoffs derived from the performance of one or more underlying assets, such as an equities index, a group of indices, or single stock. Some structured products offer a “principal guarantee” function in which they promise a certain degree of principal protection, like 100% principal protection, if held to maturity. Our attorneys have represented hundreds of investors in FINRA arbitrations related to brokerage firms’ sale of structured products and we understand the intricacies of such products, which allow us to effectively advise our clients on their claims and effectively advocate their disputes and/or controversies before an arbitration panel.
Some of the risks that customers should have been made aware of prior to purchasing structured products are their relative lack of liquidity due to the highly customized nature of the investment, and the fact that the structured product is subject to the issuer’s credit quality. If the issuer ends up filing for bankruptcy, your security might lose most of its value and you may wind up as a creditor in bankruptcy court. FINRA has set forth guidance on structured products through various Notice to Members it has issued in recent years. These notices emphasize the obligations of registered representatives to fully explain the details and risks of these complex products to customers. Furthermore, prior to recommending these products to investors, brokers are required to know whether these products are suitable for a particular investor.
Our firm has represented hundreds of investors in structured product claims against various financial firms. If you believe you may have a case relating to your structured produce investment, please contact our attorneys at (212) 696-1999 for a free consultation.