Market-Linked Notes have experienced explosive growth in the amount funds investors poured into this investment category. Brokerage firms have marketed Structured Securities Products to investors seeking current income in a low-yield interest rate environment. In most instances, brokerage firms act as an underwriter for the Market-Linked Notes issued by an affiliated bank. Otherwise, brokerage firms market and sell Market-Linked Notes issued by non-affiliated banks through selling agreements. Market-Linked Notes are recommended by brokerage firms and their financial advisors as a stable source of income. Investors do not understand the risks associated with Market-Linked Notes, unless properly explained by their financial advisors. Investors do not understand that the interest credited to their account is far more complex than a simple interest rate when it is based on a volatile security, commodity, index or currency.
Market-Linked Notes credit interest based on the performance of specific “referenced asset” which requires the use of derivatives to track and sometimes leverage returns or some form of protection. Most investors do not understand how “interest” is credited to their account. Market-Linked Notes use sophisticated derivative-based investment strategies designed to track a “referenced asset” with respect to any of the following:
- Market Index;
- Market Sector;
- Single Country;
- Leveraged; and
- Inverse Correlation.
Brokerage firms recommend Market-Linked Notes to investors as a safe and stable alternative investments to traditional fixed income investments, even though the Notes are unsecured and subject to the credit risks of the issuer. Brokerage firms and their affiliated banks that issue, underwrite and sell Market-Linked Notes include the following:
- Barclays Plc (NYSE: BCS),
- Morgan Stanley (NYSE: MS),
- Deutsche Bank (NYSE: DB),
- UBS, A.G. (NYSE: UBS),
- Merrill Lynch (NYSE: BAC),
- JPMorgan Chase & Co. (NYSE: JPM),
- Credit Suisse (NYSE: CS),
- HSBC USA (NYSE: HSBC),
- Goldman Sachs & Co. (NYSE: GS),
- Royal Bank of Canada (NYSE: RBC)
Market-Linked Notes are managed to generate greater returns when the Notes performance is tied to a more volatile security, index, commodity or currency. These greater potential returns are marketed to investors through the use of “terms” which obscure the true nature of the risk assumed by investors. Market-Linked Notes are described in Prospectuses and Offering Documents with such descriptive names as:
- Accelerated Return Notes;
- Strategic Return Notes;
- Capped Leverage Index Return Notes;
- Excess Return-Linked Notes;
- Trigger Yield Optimization Notes;
- Target Term Securities;
- Market Linked Notes;
- Return Optimization Notes;
- Auto Callable Market-Linked Step Up Notes;
- Performance Leveraged Upside Securities (PLUS);
- Equity Linked Securities (ELKs).
In August 2015, the Securities Exchange Commission (SEC) issued a National Exam Program – Risk Alert which reviewed sales practices violations of major Wall Street brokerage firms related to the supervision and sales of Structured Securities Products, commonly referred to as Market-Linked Notes. According to SEC staff, certain deficiencies were found in some brokerage firms’ supervisory and sales practices related to Structured Securities Products, including:
- Failed to Maintain and/or Enforce Controls for Investor Suitability Determinations;
- Investments in Market-Linked Notes Exceeded Concentration Limits; and
- Over 35% of Liquidations Made at Prices 20% Below Face Value of Note.
Market-Linked Notes are alternative investments that offer financial advisors higher commissions than traditional fixed income securities. Brokerage firms provide incentives for the sale of proprietary products, such as Market-Linked Notes issued by affiliated banks. Market-Linked Notes have substantial fees and/or commissions paid to affiliated companies for banking, underwriting and asset management. Brokerage firms may fail to properly explain the risks associated with Market-Linked Notes whose performance and interest crediting is tied specific security, commodity, index or currency. Did you invest in Market-Linked Notes designed to track the Price of Oil, MLP Pipelines, Indexes, Commodities Baskets, Currencies, or leveraged up to 200%?
Klayman & Toskes, P.A. has represented investors in Financial Industry Regulatory Authority (FINRA) claims against major Wall Street brokerage firms with claims for FINRA sales practice violations related to the sales of structured securities products, also known as Market-Linked Notes. Our clients’ claims for damages relate to FINRA sales practice violations of misrepresentations and omissions of material facts, conflicts of interest, unsuitable investment advice, securities concentration and failure to supervise. Learn more about our process for helping you recover your investment losses.
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