FINRA to Investors: Be Wary of Structured Products, Junk Bonds and Floating-Rate Bank Loans

FINRA has recently issued an investor alert to warn investors of the risks in certain high yield financial products, including junk bonds, structured products, and floating-rate bank loans.

Structured notes with principal protection are among the most popular products being pitched to income-oriented investors. These investments combine a zero-coupon bond and an option whose payoff is linked to an underlying asset, index or benchmark, a basket of benchmarks. The notes, which pay off based on the performance of the linked index, can provide reasonable returns and upside potential. These notes are very attractive given today’s low money market and CD rates.

In the beginning of June, regulators warned investors that structured notes with principal protection often come with confusing terms, low guarantees and can tie up money for as long as a decade. The alert from SEC and FINRA stressed that investments are not risk-free.

The SEC said principal-protected notes vary wildly by issuer and that investors tend to ignore (or fail to   understand) what is spelled out in the offering documents. Moreover, these principal-protected in many cases do not provide the principal protection investor think they are purchasing. 

Some issuers of principal-protected notes guarantee only a certain amount of principal. Sometimes, the principal is protected only if a contingency stipulated in the prospectus is met. Other sellers do guarantee 100% principal. However, if the issuer of the note goes bankrupt, the investors likely lose all or most of the money invested.

In April, UBS agreed to pay $10.7 million in fines and restitution to settle FINRA allegations that its advisers misled investors about the principal protection feature of structure notes issued by Lehman issued and failed to tell investors that they were unsecured obligations.

FINRA also warned investors about floating-rate loans, which are largely unregulated, relatively illiquid and difficult to value.

Floating-rate bank-loan funds may be marketed as less vulnerable to interest rate fluctuations. However, these products are subject to considerable credit, valuation and liquidity risk that investors should be fully aware of.

If you are an investor that has suffered losses investing in a structured product, principal-protected note, junk bond, or floating-rate bank loan, your losses may be recoverable through securities arbitration.  Please contact one of our attorneys at 312-332-0000 to discuss your recovery options.