The Security and Exchange Commission (SEC) issued a press release today jointly with the Financial Industry Regulatory Authority (FINRA) dealing with structured products with "principal protection" - so called "principal protected notes." This press release announced that an investor alert had been issued to educate and warn investors about the substantial risks associated with investing in structured products.
Structured products with "principal protection" have grown exponentially in the past few years and are substantially more complicated investments than many investors are led to believe. Many of these products offer a "principal protection" in the sense that they guarantee to return of at least the principal to the investor at the end of the holding period. Structured products often have high fees, high transaction costs, and are priced well above their fair market price, see for example Henderson and Pearson (2011). Moreover, structured products depend on the solvency of the issuer, as was very clear when Lehman Brothers collapsed. SLCG has written several papers on the topic including a paper that describes structured products after the collapse of Lehman Brothers.
SLCG warns investors of the hidden costs and risks to structured products and encourages investors to carefully understand such products - such as their payoff structures, associated fees, liquidity and credit risks - before committing to purchase them.
