Structured Products

A “structured product” is a financing instrument, such as a bond or note, which contains embedded complex options or swaps that alter risk and return/yield characteristics in unique ways. Since complex structured products are highly customized they are often issued on in a private placement of securities (though they are also offered as public securities).

Investment banks and broker-dealers offer structured products across asset classes. They claim to have expertise covering equities, fixed income, credit, currencies and commodities, funds and alternative investments.  They represent that structured products, also known as structured investments, can provide enhanced return and increased diversification for client portfolios, and they sell these financial instruments through distributors to high net worth individuals and retail investors around the world.

In fact, Morgan Stanley Smith Barney’s website states that:  “Structured Investments offer individual investors innovative opportunities to pursue their financial objectives. Structured Investments can be used by a wide range of investors as compliments to direct investments or to take advantage of market trends with structures tailored to an investor’s specific risk/return profile.Structured Investments can be used to help clients achieve a wide range of investment objectives, by either potentially reducing the risk exposure of a portfolio or providing access to a variety of underlying assets, including stocks, bonds, interest rates, currencies and commodities.

Likewise, Barclays Capital represents on its website that:  “Structured products are typically tailor-made to meet specific investor requirements and involve the full range of asset classes in which Barclays Capital operates; rates, credit, FX, equities, commodities, and emerging markets, as well as hybrids thereof. Whilst our products typically employ a range of complex derivative products, they also involve cash products often as part of a larger whole, and also where complex, multi stage transactions are contemplated.  We have country specific structured product teams working on client specific solutions. There are also dedicated sector and product specific sub teams which, for example, focus on asset liability modelling solutions for insurance and pension funds. Other teams develop products for clients for onward distribution to their retail and smaller institutional clients.”

In contrast, the head of the Financial Industry Regulatory Authority (FINRA) announced that structured product sales to retail investors are “an area of concern.”  While predicting future enforcement actions “with respect to particularly egregious examples,” he admonished individual brokers, saying that they must “truly understand the products they sell.” FINRA warned brokers about relying on their firm’s approval as a surrogate for a thorough suitability analysis.

When the markets fell as a result of the fallout from Wall Street’s sub-prime orgy, investors really got burned. Investors who were sold Lehman Brothers-issued structured products from UBS learned, to their almost-universal surprise, that their supposedly “Principal-Protected” structured products were not protected. Despite the fancy and alluring name, it was all just unsecured debt. Investors at other firms like Merrill Lynch, Morgan Stanley and Smith Barney learned that their “convertible notes,” bought to earn income, had overnight been “converted” into depreciated stocks. Investor losses were huge.

If your financial adviser has recommended or sold a structured product to you, please contact Wittenberg Law to discuss your legal rights and options.