Structured Products

The term “structured product” doesn’t have any widely accepted definition in the investment industry. But one stock exchange has defined structured products as “products that are derived from and/or based on a single security or securities, a basket of stocks, an index, a commodity, debt issuance and/or a foreign currency, among other things” and would include “index and equity linked notes, term notes and units generally consisting of a contract to purchase equity and/or debt securities at a specified time.”

Structured products usually combine a note and a derivative, often an option such as a put or call. The note pays interest to the investor while the derivative component establishes the payment at maturity. When the derivative is a put option sold by the investor, it gives the issuer the right, but not the obligation, to sell the investor the reference security or securities at a predetermined price. When the derivative is a call option sold by the investor, it gives the issuer the right, but not the obligation, to buy from the investor the reference security or securities at a predetermined price. (In options-speak, “reference security” just means the underlying security.) Despite the derivative component of a structured product, these products are often marketed to investors as debt securities.

Structured products are increasingly being targeted at retail investors, often with starkly misleading sales pitches. The NASD became sufficiently concerned about sales abuses that in September 2005 it issued Notice to Members 05-59, “NASD Provides Guidance Concerning the Sale of Structured Products.” This Notice can be found on the NASD’s website at www.nasd.com and should be reviewed if anyone pitches you a structured product. We’ll simply tell you that these products are almost never suitable for a retail investor. Yet they are often marketed to consumers as a predictable source of income or a conservative investment, ignoring the substantial risk posed by the derivative. Moreover, some brokers and brokerage firms assure investors of the safety of structured products by referring to the product's credit rating, even though these ratings reflect the creditworthiness of the issuing company and have nothing to do with the potential performance of the investment. The bottom line is that these products are far too risky for the average investor. These risks can include:

• Substantial or complete loss of principal
  
  
• Fluctuations in the price, level, or yield of underlying investments
  
  
• Fluctuations in the interest rates, currency values, and credit quality of issuer
  
  
• Limits on participation in appreciation of the underlying investments
  
  
• Limited liquidity
  
  
• Credit Risk of the issuer and/or conflicts of interest

The sale of structured products can violate a broker's obligation to recommend only suitable investments and to present a fair and balanced picture of the risks and benefits of an investment.

If you have suffered a substantial economic loss because your investment advisor failed to alert you to the inherent risks of a structured product, please contact a financial misconduct lawyer at Hermann, Cahn & Schneider in Cleveland, Ohio, today. Our attorneys have a thorough understanding of these complex investments and can determine whether or not you are the victim of investment fraud or stockbroker misconduct.