Complex Structured Products
A new study that was conducted by the nonpartisan policy center Demos and The Nation Institute has revealed that retail investors lost $113 billion or more in complex structured notes and other derivatives since 2008, according to Investment News. Louis Straney, a securities arbitration consultant who participated in the study, reported that “In my three decades of Wall Street experience, I have not seen any other product as absurdly destructive as retail investments linked to structured products.” Joe Borg, the Director of the Alabama Securities Commission, said that these complex structured products were peddled to the elderly who could ill afford to lose money from their retirement accounts. He labeled that group as a “scared group” that was concerned with outliving their money which was invested in low yielding investments like CDs and bonds.
Structured notes with principal protection is one of the products that is pitched to income oriented investors like seniors who are dissatisfied with the meager returns produced by money market and CD rates. Those products combine a zero coupon bond and an option whose payoff is linked to an underlying asset, index or benchmark, or a batch of benchmarks. Unfortunately, these products do not always protect the principal as the name implies, according to recent notices from the SEC and FINRA stressing that the investments are not risk free.
In related news, UBS Financial reached an agreement in April 2011 for $10.7 million in fines and restitution to settle allegations by FINRA that it had misled investors about the “100% Principal Protection” notes issued by Lehman Brothers Holdings that UBS sold in months leading up to the time demise and bankruptcy of Lehman in 2008.