FINRA Warns About Principal-Protected Structured N

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borei's picture
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http://www.aboutlawsuits.com/finra-warns-principal-protected-notes-7538/

Published: January 5th, 2010 • One Comment

Financial industry regulators have warned brokerage firms not to overstate the security of principal-protected notes (PPNs), which are not risk-free as their names often suggests. The reminder comes after a number of financial fraud lawsuits have been filed against brokers who allegedly sold the notes as conservative and safe investments without adequately disclosing the risks.

The Financial Industry Regulatory Authority (FINRA) released a regulatory notice last month, reminding firms that they are required to ensure fair and balanced information is provided when promoting the use of principal-protected notes. The notice warns brokerages not to overstate the level of protection or the investment’s potential returns, and reminds firms that they have a duty to make certain that all of their registered representatives understand the risks, terms and costs of the products they are selling.

Principal protected notes, also referred to as guaranteed linked notes or structured notes, are often promoted as providing a “guaranteed” protection of 100% of the invested capital as long as the note is held to maturity. Investors are often told that regardless of market conditions, they will receive back all of the money they invested. However, the guarantee is only as good as the company that is making it, and FINRA points out “these products are not risk-free, and their terms and structures can be complex.”

Following the collapse of Lehman Brothers in September 2008, many investors were left with Lehman Brothers principal protected notes that became essentially worthless. Some investors were sold these Lehman structured notes even during the months right before the bankruptcy filing, with no indication that the investment bank had a severely weakened financial position as a result of heavy investments in the subprime mortgage market.

Class action lawsuits and individual stock broker fraud claims have been filed by investors who were sold these principal protected notes without adequate disclosure of the risks and terms. Last month, a panel of arbitrators through FINRA awarded $200,000 to an investor who filed a Lehman Brothers note lawsuit against UBS Financial Services. This was the first of what many expect will be a number of Lehman Brothers principal protected notes awards arising out of sales by UBS and other brokerage firms.

FINRA is a non-governmental regulatory body that oversees more than 5,000 brokerage firms throughout the United States. Investors are able to resolve disputes against brokerage firms through FINRA for claims involving breach of fiduciary duty, negligence, misrepresentation, breach of contract, unauthorized trading and other claims that investments were improperly handled.

The regulatory notice reminds brokerage firms that financial regulations prohibit the use of exaggerated, unwarranted or misleading statements or the omission of facts that would make promotions or advertisements misleading by their absence.

“PPNs sold to retail investors often have reassuring names that include some variant of ‘principal protection,’ ‘capital guarantee,’ ‘absolute return,’ ‘minimum return’ or similar terms,” FINRA warns in the notice. “However, they are not without risk. Most importantly, the principal guarantee is subject to the credit-worthiness of the guarantor.” The notice warns that some PPNs have high fees and hidden costs, and states that firms should take these costs into account when determining customer-specific suitability.

The regulatory notice states that promotional materials used by firms must include disclosures regarding:

The level of principle protection offered
The credit-worthiness of the guarantor
The potential returns and pay-out structure
The investor’s ability to access funds before maturity date or the expiration of a lock-out period.
Costs and fees that could affect the return of the principal
Tags: Financial Fraud, Lehman Brothers, Principal Protected Notes, Stock Broker Fraud, UBS

There Is One Comment So Far • (Add Your Comments)

Comment by john4153 on 5 January 2010:
UBS leads the way in fraud. First Auction Rate Securities, then PPN’s. I got hooked on the ARS, but fortunately ducked the PPN’s. Best advice, when UBS presents a plan to you, run.

Shania Twain's picture
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You get 3 emails a day on this crap.    

Sportsfreakbob's picture
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if the client wants true protection, limit yourself to FDIC insured PPN's.

iconsult100's picture
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Is Morgan Stanley still pushing the Principal Protected Commodity Notes and the Buy-Write strategies on the various indexes?
I am interested in knowing how those are working out.  Several of them had stopped paying out income around the time I resigned.
 
 

borei's picture
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Isn't the FDIC insolvent?

Moraen's picture
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borei wrote:Isn't the FDIC insolvent?By the definition of insolvent - yes.

borei's picture
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Moraen wrote:
borei wrote:Isn't the FDIC insolvent?By the definition of insolvent - yes.
Oh good, now I feel better.

Mister Client this Principal Protected CD is insured by an insolvent agency of the Unites States Government. What's the worst thing that can happen?

Milyunair's picture
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The opportunity cost of having your money tied up in Mickey Mouse investments is always a risk.
I know the Europeans like 'em, but I can't figure out why.

Shania Twain's picture
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Milyunair wrote: The opportunity cost of having your money tied up in Mickey Mouse investments is always a risk.
I know the Europeans like 'em, but I can't figure out why.

Witch Doctor.
Client takes gas pipe.

Same as*holes that made CDO's

Sportsfreakbob's picture
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FDIC may be technically insolvent, but as the saying goes, too big to fail, start up the printing presses. Clients will get their money back one way or the other, its just that the money may not be worth much

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Anyone who witnessed the past 24 months, and is still concerned about FDIC insured deposits must be completely brain dead.  FDIC has NEVER been a solvent entity.  The day a person doesn't get their money back if they under the FDIC limit, is the day the world financial system collapses.  Do some reading on the money multiplier, and you tell me if the U.S. Government would ever risk the bank-run that would occur in the above scenario. 

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well said ice

borei's picture
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Clients get insolvent.

Shania Twain's picture
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iceco1d wrote: Anyone who witnessed the past 24 months, and is still concerned about FDIC insured deposits must be completely brain dead.  FDIC has NEVER been a solvent entity.  The day a person doesn't get their money back if they under the FDIC limit, is the day the world financial system collapses.  Do some reading on the money multiplier, and you tell me if the U.S. Government would ever risk the bank-run that would occur in the above scenario. 

yep

And on sept 20th hank told the world that Money market was also basically "govt backed". (TARP)

Then Ben did the same for commericial paper, credit cards, auto loans etc . (TALF,PPIP)

Hank a hero.     

saved free world.

Guy is hated because people are clueless
and no one realizes what world would look like w/o the hanksters actions

If this guy didnt that the stones and brains to go to freaking congress the next damn day for the 750 B.......system was toast.

global run on MM's and CP. game over

kaos

If we would have had some liberal pussy in there......toast

God bless GS and that bad ass little linebacker from Dartmouth.

That "2 page" request for 750 B one of the most important documents in human history

TALF program

Anonymous's picture
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Shania Twain wrote: iceco1d wrote: Anyone who witnessed the past 24 months, and is still concerned about FDIC insured deposits must be completely brain dead.  FDIC has NEVER been a solvent entity.  The day a person doesn't get their money back if they under the FDIC limit, is the day the world financial system collapses.  Do some reading on the money multiplier, and you tell me if the U.S. Government would ever risk the bank-run that would occur in the above scenario.  yep And on sept 20th hank told the world that Money market was also basically "govt backed". (TARP) Then Ben did the same for commericial paper, credit cards, auto loans etc . (TALF,PPIP) Hank a hero.      saved free world. Guy is hated because people are clueless and no one realizes what world would look like w/o the hanksters actions If this guy didnt that the stones and brains to go to freaking congress the next damn day for the 750 B.......system was toast. global run on MM's and CP. game over kaos If we would have had some liberal pussy in there......toast God bless GS and that bad ass little linebacker from Dartmouth. That "2 page" request for 750 B one of the most important documents in human history TALF program
 
nicely put

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Maintaining liquidity in the system is one thing. Saving the market from "bad" investments ( financial instruments that cross the boundry of market credibility ) is another.
Way out West, your east coast preppies, corporate and government, are not revered as bad assess. Your guys can go running to Congress for liquidity, but don't you come running out here for approval.

Shania Twain's picture
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Milyunair wrote: Maintaining liquidity in the system is one thing. Saving the market from "bad" investments ( financial instruments that cross the boundry of market credibility ) is another.
Way out West, your east coast preppies, corporate and government, are not revered as bad assess. Your guys can go running to Congress for liquidity, but don't you come running out here for approval.

I hate govt.    I love free markets.

But, I guess capitalism blows up every 100 years or so......

When Libor and ted spread imploded and reservre fund went under a buck

........trust was very close to being bye bye

new scorecards I guess, 12 gauges, food, gold?

a dollar is a piece of paper. no more.

Bush admin. had contingency plan for Marshall Law

Hank is the MF man

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The effect of the bailout will be to ensure liquidity during the deleveraging of the financial system.
Ironically, the result of  coordinated greed by bad government policy and corporate actions is just to hurt the common man, the one that government claims to want to help.
 
"Deleveraging" will cut out intermediary debt instruments in the same manner moving jobs to China provided an immediate and short term increase in the standard of living for the average consumer, and a negative longer term effect.
 
I'm not afraid of free markets and free trade, but these guys that make the rules of the game and then go hiding behind the government aren't heros.
 
Those of us who have been holding clean portfolios of stocks, bonds and cash have realized positive returns of at least 4.5% annual return, compounded, over the past ten years. Not really hurt by the "crisis".
 
Except, we have to help shoulder  the debt put on us by the greedy preppies back East.
 
Fortunately, the fishing line has run out and is tight. Unfortunately, corporate productivity has increased and earnings are positive, but many jobs aren't coming back.
 
Wirehouses are always inventing complicated products that create greater potential return, with more risk, and greater fees and profits.
 
If financial advisors understand economics, they won't be impressed by the bailout.
 

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Milyunair wrote:

Way out West, your east coast preppies, corporate and government, are not revered as bad assess.

Your guys can go running to Congress for liquidity, but don't you come running out here for approval.

Way out West?    

Michigan Militia type?   

(You guys might have it right)

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I don't know you, Shania, but if you ever get tired of the rat race, you can make a pretty good living panning gold and camping in the Rockies, Cascades, or Sierra Nevada.

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Milyunair wrote: I don't know you, Shania, but if you ever get tired of the rat race, you can make a pretty good living panning gold and camping in the Rockies, Cascades, or Sierra Nevada.

awesome. I love that part of USA. a dream.

First I want to do that logging in pacific North west like on that discovery channel show (ax men?)
That looks like a freakin blast.   

With that monster machine that has a wire run down a slope and then the guys hook these huge logs onto wire and drag it up the hill.    sawing down those monster pines.    how cool

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Awesome show. Now we're talking Coastal Range, about 45 degrees and raining, same temperature as the Pacific. Free heat in the winter.
 
If you want to be a logger, first thing, take up chewing tobacco. So you're jacked up and paying attention after you set the choker hook to when the wire rope rig goes tight and the log pile moves.
 
Even folks in these parts have forgotten how we ever got enough money to even have a government. Much less pay money to the feds and all the other preppie corporate boys and girls back east.
 
I hear Amy Roloff is speaking at the chamber of commerce this month.

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Milyunair wrote:
If financial advisors understand economics, they won't be impressed by the bailout.
 
If financial advisors understand economics, they wouldn't be financial advisors, they'd be economists. :)

I agree though. Helicopter Bernanke has exploded the Money Supply, nearly trebled the asset side and created a bloat in the constipated banking system that is going to let loose with a thundering rush one day.

So much for Monetary Policy.

Congress has spent beyond the wildest dreams of the most avarice politician ever and state and local governments have followed along. Page the Governator for an example.

Now the question is, where is safety?

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Safety is the right mix of cash, stocks and bonds, at a reasonable fee.
 
And transferring certain risks.
 
Yeah, too bad Americans generally aren't better economists. You have books like Freakonomics to help popularize some concepts, though.
 
 

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Milyunair wrote:Safety is the right mix of cash, stocks and bonds, at a reasonable fee.
 
And transferring certain risks.
 
Yeah, too bad Americans generally aren't better economists. You have books like Freakonomics to help popularize some concepts, though.
 
 Freakonomics is more micro than macro.  Although still very interesting.

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There should be a way to make money off that interest. A win -  win.
Maybe it's called Libertarianism. In that case, you make money off books, not being a politician.
 
There must be a way.

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Milyunair wrote: Awesome show. Now we're talking Coastal Range, about 45 degrees and raining, same temperature as the Pacific. Free heat in the winter.
 
If you want to be a logger, first thing, take up chewing tobacco. So you're jacked up and paying attention after you set the choker hook to when the wire rope rig goes tight and the log pile moves.
 
Even folks in these parts have forgotten how we ever got enough money to even have a government. Much less pay money to the feds and all the other preppie corporate boys and girls back east.
 
I hear Amy Roloff is speaking at the chamber of commerce this month.

back in the day....in another life...I used to do a couple of tins of kodiak a day

Pop it in while cold calling. that nasty crap gives you an awesome buzz.

the dentist scared the living sh*t out of me.   Took a picture of my lip and showed me the stages of cancer.

ive really become a pussy

its one vice i really do miss.   

There is one other one i really miss also.

(len bias scared me on that one)

Im darn close to an adult now.

although a girly man

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Haha, that's a great picture, cold calling on a couple of cans of chew. Nice to know, if things get really bad, that's still an option, we still have those skills. And could probably still hold our own at a lens bias memorial party if wanted - revenge of the girly men.
Here's hoping to be less of a pussy once the kids are grown and flown.

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Shania Twain wrote: Milyunair wrote: Awesome show. Now we're talking Coastal Range, about 45 degrees and raining, same temperature as the Pacific. Free heat in the winter.
 
If you want to be a logger, first thing, take up chewing tobacco. So you're jacked up and paying attention after you set the choker hook to when the wire rope rig goes tight and the log pile moves.
 
Even folks in these parts have forgotten how we ever got enough money to even have a government. Much less pay money to the feds and all the other preppie corporate boys and girls back east.
 
I hear Amy Roloff is speaking at the chamber of commerce this month.

back in the day....in another life...I used to do a couple of tins of kodiak a day

Pop it in while cold calling. that nasty crap gives you an awesome buzz.

the dentist scared the living sh*t out of me.   Took a picture of my lip and showed me the stages of cancer.

ive really become a pussy

its one vice i really do miss.   

There is one other one i really miss also.

(len bias scared me on that one)

Im darn close to an adult now.

although a girly manI miss it.  IMO, it gives you an edge on the battlefield.  My wife would not marry me as long as I continued to dip.  I was a big Kodiak Ice fan.  I'm weak.

Milyunair's picture
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Copenhagen long cut. Too bad it's so bad.

Shania Twain's picture
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Milyunair wrote: Copenhagen long cut. Too bad it's so bad.

It would tear up sections of my mouth so bad i would have to rotate.

let the raw, ripped up, cancer infested area heal a bit.

Im betting this is not good for you.

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Shania Twain wrote: Milyunair wrote: Copenhagen long cut. Too bad it's so bad.

It would tear up sections of my mouth so bad i would have to rotate.

let the raw, ripped up, cancer infested area heal a bit.

Im betting this is not good for you.

That is what I tell people who work at UBS.

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Milyunair wrote:Copenhagen long cut. Too bad it's so bad. At least it's long cut and not snuff.  One particular week in Iraq, we were staking out the border looking for insurgents crossing.  I ate up a whole log trying to stay awake and not be bored. 

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You're lucky you didn't see little green men and pink animals popping out of the sand - or maybe you did. Thanks for protecting the border while I was watching Survivor.

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