- February 5, 2020
- Structured Products
The Wolper Law Firm, P.A. is expanding its investigation of brokerage firms and financial advisors who sold Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes. In recent years, brokerage firms and Financial Advisors across the country have aggressively marketed and sold Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes to retail customers as a safe means to achieve higher yields in a low interest rate environment.
What are Steepener Notes?
Steepener Notes, Adjustable Rate Market Notes and Spread Linked Notes are not traditional investments but rather structured products. During the first 12-24 months, the Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes generally pay above-average “teaser” rates of interest. However, for each year thereafter until maturity, which can often be 15-20 years, the interest the interest rate is determined by a complex formula that is correlated to a stock index, such as the S&P 500, a fixed income index or 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 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 Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes but generally not understood by retail customers.
In addition, some Steepener Notes, Adjustable Rate Market Notes, and Spread Linked Notes have call features. This enables the issuer to call (or redeem) the security 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 security. 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 security if certain other conditions are met. This eliminates the possibility of the investor continuing to receive the higher income.
Examples of these products include the following:
- HSBC Callable Leveraged Steepener Notes
- Merrill Lynch Strategic Return Notes
- BNP PARIBAS Structured Notes
- JP Morgan Chase Return Optimization Notes
- JP Morgan Target Term Securities
- Credit Suisse Structured NotesMarket-linked CDs
- Callable Quarterly CMS Spread-Linked Notes
- Structured CDs
- Leverage Callable CMS Curve Linked Notes
- Callable Interest Rate Spread CDs
- Callable CMS Spread Notes
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 Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes 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, Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes that are correlated to fixed income or derivative benchmarks are no longer paying any income, which has caused the principal value to decline substantially. Investors are now facing the prospect of holding these investments until maturity without an income stream. Alternatively, if an investor elects to sell their Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes prior to maturity, they may be forced to pay penalties and realize a large principal loss.
In speaking with many clients who purchased Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes, 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 bonds with a predictable 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 Steepener Notes?
If you purchased Steepener Notes, Adjustable Rate Market Notes, Spread Linked Notes and Structured Notes, 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.