Articles Tagged with Strategic Return Notes

shutterstock_53865739According to the Wall Street Journal, The Securities and Exchange Commission (SEC) is preparing an enforcement action against brokerage firm Merrill Lynch over an investment that collapsed losing investors as much as 95% of their initial investment.  According to the financial advisors at the firm, the advertising and marketing for the product was called “borderline crooked.”

The SEC action involves a product called Strategic Return Notes that Merrill began selling in 2010 and raised about $150 million for.  Market-Linked Notes to generate are structured product investments that create returns through the use of embedded derivatives designed to track the performance of a security, index, commodity or currency.  Brokerage firms like Merrill Lynch have perverse incentives to market these proprietary products over safer and cheaper alternative investments.  Structured Products like Market-Linked Notes often have substantial fees and/or commissions paid to affiliated companies for banking, underwriting, asset management, and ultimately broker commission.

The Strategic Return Notes in question are linked to a Merrill Lynch index tracking the volatility of the S&P 500 stock index.  According to the Wall Street Journal, the five-year notes lost value rapidly as market volatility fell and the cost of buying the options that allow the note to track the index rose sharply.  Because of the substantial costs of the options, volatility based investments tend to lose money over the long term no matter what the performance of the underlining index is.  According to the article, roll costs for the options averaged an astounding 12% of the principal per quarter in the first half of 2011, before falling to less than 4% per quarter in the second half of the year.  However, clients and brokers alike claim they were never told the costs could grow so large.

shutterstock_26269225The law offices of Gana Weinstein LLP are announcing their investigation into potential securities claims against brokerage firms over sales practices related to the recommendation of structured notes linked to oil & gas. These structured products are issued by Barclays (NYSE:BCS), Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB), UBS (NYSE:UBS), Citigroup (NYSE:C), Bank of America Merrill Lynch (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Credit Suisse (NYSE:CS), and BNP Paribas among others firms. The structured notes are issued under the names Principal Protected Notes, Principal Protected Booster Notes, Buffered Bullish Notes, Accelerated Return Notes, Strategic Return Notes, Capped Leverage Return Notes, Target Term Securities, Market Linked Notes, E-Tracs, Return Optimization Notes, Auto-Callable Securities, Performance Leveraged Upside Securities (PLUS), and Equity Linked Securities (ELKs).

Brokers often pitch structured products as providing “downside protection” against losses to a related index while allowing modest up side gain potential. However, today investors are waking up to the fact that structured products linked to the oil market are offering no protection. According to Bloomberg, retail structured notes meant to protect against a drop in crude failed to do so. Of the $437.1 million in oil related structured products that have matured this year, 44 percent, or $194.3 million of principal has been lost. The largest deal in the oil space is a $104.6 million Barclays issuance in April 2014 that has lost 42 percent of its value.

Indeed, Bloomberg found that all but three of the 39 notes examined protected against a certain percentage of losses, typically in the range of 10 percent to 20 percent. These notes quickly breached these loss limits as crude oil prices have declined more than 60 percent. Once the securities breached the “soft barriers” investors became exposed to the full loss at maturity and the value of the notes became wholly dependent on the change in oil prices.

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