Investors In Market Linked CDs Continue To Experience Loss Of Principal And Income
The Wolper Law Firm, P.A. is expanding its investigation of brokerage firms and financial advisors who sold market linked certificates of deposit (“Market Linked CDs”) a/k/a structured certificates of deposit (“Structured CDs”), adjustable rate certificates of deposit (“Adjustable Rate CDs”) and equity-linked certificates of deposit (“Equity Linked CDs”) to retail customers.
In recent years, brokerage firms and Financial Advisors across the country have aggressively marketed and sold these securities to retail clients as safe and secure traditional investment vehicles.
Market Linked CDs are not traditional CDs but rather structured products. They generally carry longer maturities and the payment of interest is adjustable, not fixed. For many of these structured products, the interest rate is determined by a complex formula that is correlated to a stock index, such as the S&P 500. In other instances, it may be correlated to a derivative benchmark such as the Constant Maturity Swap Rate, or CMS Swap rate. Depending on the value of the benchmark, the rate of interest paid to the Market Linked CD investor may increase to a cap set forth in the prospectus or decrease to zero. These nuances are set forth in the prospectus of the Market Linked CD but generally not understood by retail customers.
In addition, Market Linked CDs have call features. This enables the issuer to call (or redeem) the Market Linked CD prior to maturity if, for example, the interest rate environment requires the issuer to pay higher than expected rates of interest to the investor. Alternatively, if the interest rate environment permits the payment of a lower rate of interest, the issuer is under no requirement to call the Market Linked CD. The call feature creates an imbalanced risk/return environment for the customer, who is often lured into the investment with the prospect of higher investment returns. In reality, to the extent a higher return is warranted pursuant to the prospectus, the issuer has the right to call the CD if certain other conditions are met. This eliminates the possibility of the investor continuing to receive the higher income.
The interest rate environment in the United States has remained artificially low since 2008, principally due to steps taken by the United States government and Federal Reserve. As interest rates began to rise in 2016, it had a material impact on Market Linked CDs that were correlated to fixed income or derivative benchmarks.
In 2018, the yield curve, which is a measurement of the spread between long-term and short-term rates, began to flatten. This has often occurred throughout history in a rising interest rate environment. In 2019, the yield curve inverted, meaning short-term rates have a higher yield than long-term rates. During this course of history, this has often signaled the beginning of a recession.
Presently, Market Linked CDs that are correlated to fixed income or derivative benchmarks are no longer paying any income. Investors are now facing the prospect of holding these investments until maturity without an income stream. Alternatively, if an investor elects to sell their Market Linked CD prior to maturity, they may be forced to pay penalties and realize a principal loss.
In speaking with many clients who purchased Market Linked CDs, Structured CDs, Adjustable Rate CDs, and Equity Linked CDs, it has become apparent that brokerage firms and Financial Advisors did not adequately explain the characteristics and risks of these investments prior to the transaction. Many investors believed that they purchased traditional CDs or CDs with a guaranteed minimum interest payment.
Making suitable investment recommendations is the cornerstone of proper investment advice. All brokerage firms and financial advisors have a duty to recommend suitable investments that are consistent with the needs and objectives of the investor. Brokerage firms and financial advisors must learn all material facts about an investor before making any recommendations and must match all investments with a customer’s stated investment profile. Failure to recommend suitable investments may result in a claim to recover attenuating investment losses.
What Should I Do If I Invested In Adjustable Rate CDs?
If you purchased Market Linked CDs, Structured CDs, Adjustable Rate CDs, and Equity Linked CDs, and have either experienced a loss of income and/or principal loss, you may be entitled to recover those losses. The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. We can be reached at 800.931.8452 or by email at firstname.lastname@example.org.