Suffered Losses from Structured Product Investments?
Structured notes, including equity linked notes, reverse convertibles, autocallables, and principal protected notes, are complex investments sold by major brokerage firms like UBS, Barclays, HSBC, Morgan Stanley, RBC, and Goldman Sachs. While often marketed as safe or providing “principal protection” with attractive yields, these structured products can carry significant, often hidden, risks that may lead to substantial losses for investors.
The Hidden Risks of Structured Notes & Autocallables
Many investors are unaware of the true nature of these structured instruments.
Here’s what the issuing firms may not have fully explained:
Complexity & Embedded Options
Structured notes derive their value from underlying assets (like the S&P 500, Russell 2000, individual stocks such as Apple, Amazon, or even volatile assets like Lucid) and complex embedded options. Often, investors are unknowingly selling put options, taking on downside risk without appropriate compensation.
Principal At Risk
Despite names like “principal protected notes“, your principal is often not fully guaranteed. Many structured notes, including reverse convertibles and autocallables, have “knock-in levels” or triggers. If the underlying asset drops below this level (e.g., 70% or even 50% of its initial value), you could lose a significant portion, or even nearly all, of your initial investment at maturity. The “protection” is often just the issuer’s own creditworthiness.
Contingent Coupons
The high “coupon” or yield is often not guaranteed interest. In many products, especially autocallable notes, these payments are “contingent.” If the underlying asset (or the worst performing asset in a basket) falls below a specified barrier level, you may stop receiving payments altogether.
Worst-Of” Baskets
Some notes are linked to a basket of multiple assets (stocks, indices, ETFs). Your return and principal repayment often depend on the performance of the worst-performing asset in that basket, significantly increasing your risk.
Autocall Risk
Autocallable structured products have a deceptive feature. If the underlying asset performs well, the issuer typically “calls” the note back early, paying back the principal but depriving the investor of further coupon payments. However, if the underlying asset performs poorly, the note is not called, and the investor remains locked in, potentially facing large losses at maturity. This “heads the issuer wins, tails the investor loses” structure benefits the issuing firm.
Liquidity & Valuation
These are typically illiquid investments with no active secondary market. Furthermore, the “Estimated Value” provided by issuers on Day 1 is often inflated, calculated using internal rates that don’t reflect true market value, hiding built-in costs and issuer profits.
Broker Sales Practice Obligations
Protecting Your Interests
When a broker or financial advisor recommends a structured product, they have significant legal and regulatory obligations designed to protect you, the investor. These are not just guidelines; they are rules that must be followed.
Regulation Best Interest (Reg BI)
This SEC regulation establishes a high standard of conduct. Your broker must act in your best interest when recommending an investment. This means they cannot place their own financial interests (like higher commissions from selling complex products) ahead of yours. Reg BI includes:
- Care Obligation: They must exercise reasonable diligence, care, and skill to understand the potential risks, rewards, and costs of the structured note. They need a reasonable basis to believe the product is in your best interest, considering your specific financial situation.
- Disclosure Obligation: They must provide you with full and fair disclosure of all material facts about the structured note and their relationship with you, including any conflicts of interest.
- Conflict of Interest Obligation: Firms must establish policies to identify, disclose, and in some cases, eliminate or mitigate conflicts of interest.
Suitability (FINRA Rule 2111)
While Reg BI is the prevailing standard for retail customers, the principle of suitability remains crucial. Your broker must have a reasonable basis to believe that a structured note is suitable for you based on your investment profile. This includes your age, financial situation and needs, tax status, investment objectives, investment experience, time horizon, liquidity needs, and risk tolerance. For complex products like structured notes, this obligation is heightened.
Understanding the Product
Brokers cannot recommend what they don’t understand. They have a duty to perform reasonable diligence to understand the nature of the structured note, including its complex features, risks (like loss of principal, illiquidity, how the payoff is calculated), and potential rewards.
Fair Dealing and Disclosure
Brokers must deal fairly and provide a balanced picture of both the risks and benefits of structured products. They should not misrepresent material facts, omit crucial risk disclosures, or use misleading marketing materials. For instance, they should not portray these products as “conservative” or a source of “predictable income” unless such statements are accurate, fair, and balanced.
Heightened Scrutiny for Complex Products
Regulators like FINRA have specifically advised that brokerage firms must take additional steps to ensure structured notes are suitable for their specific investors. This includes ensuring that such products are only sold to investors for whom the associated risks are appropriate and being able to articulate why.
If your broker failed to meet these obligations
for example, if they didn’t adequately explain the risks, recommended an unsuitable product, or prioritized their commission over your best interests – you may have a claim to recover your losses.
Issuers and Products of Concern
Our firm is investigating losses related to structured products issued by major financial institutions, including but not limited to:
- UBS
- Barclays
- HSBC
- Morgan Stanley
- RBC (Royal Bank of Canada)
- Goldman Sachs
Specific product types under review include:
- Autocallable Yield Notes / Securities
- Reverse Convertibles (including single observation and enhanced)
- Buffered Notes / PLUS / Return Optimization Securities
- Trigger Phoenix Autocallable Optimization Securities
- Equity Linked Notes (ELNs / ELKS)
- Tracking Securities
- Principal Protected Notes (PPNs)
These products have been linked to a vast array of underlying assets, from major indices like the S&P 500, Russell 2000, and EURO STOXX 50, to ETFs and individual stocks such as Apple, Amazon, Freeport-McMoRan, Bank of America, Meta (Facebook), Ford, Citigroup, and many others.
Lost Money in Structured Products? We Can Help.
If you invested in structured notes, equity linked notes, reverse convertibles, autocallables, or other complex structured products and suffered significant losses, the investment may have been misrepresented or unsuitable for your financial situation and risk tolerance.
The Securities Lawyers have experience fighting for investors who have been harmed by complex financial products. We understand the intricacies of these investments and how issuers and brokers may fail in their duties to clients.
Contact us today for a free, confidential consultation. Let us evaluate your case and help you understand your options for recovering your investment losses.