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FINRA Investor Alert: Asking the Right Questions

The Grass Isn't Always Greener-Chasing Return in a Challenging Investment Environment

The Financial Industry Regulatory Authority (FINRA) published an Investor Alert to help retail investors, who are seeking for higher returns through investing in complex securities such as structured products, ask the right questions before making such investment decisions.

Investors are encouraged to read through the FINRA article. The article includes a section on 'Structured Retail Products', since we have conducted significant research on this topic.

There are different types of structured retail products. Once such product is the principal protected note. The principal protected note does not pay interest. Its payoff is linked to the an underlying security or index, but it returns at minimum the face value of the note at maturity if the underlying security or index falls below an amount that equates to the face value of the note. There is a risk that the note returns less than a comparable fixed income security, or that the note returns nothing at all. There is liquidity risk, the risk that an investor who wants to sell her principal protected note before maturity might not be able to due to the lack of a secondary market. There is credit risk, the risk that the issuer fails to pay investors any or all of the returns to the note. There are other risks.

Over the past few months, structured products have continued to receive the attention of regulatory authorities. Back in April this year, FINRA fined UBS Financial Services $10.75 million for failing to emphasize that the Lehman-issued 100% principal protected notes sold to investors "were unsecured obligations of Lehman Brothers." Back in June this year, the Securities and Exchange Commission (SEC) warned about investing specifically in principal protected notes.

We at SLCG believe that regulatory authorities provide valuable information for retail investors. SLCG has a dedicated website providing papers, notes and calculation tools on a variety of structured products. Specifically, we have written related papers on: