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Wall Street’s most recent synthetic investments, despite the catchy names, offer more risk that your broker is likely to disclose. The retail market for structured notes or equity linked notes, with principal protection has skyrocketed in recent years. Why? Because they are easy to sell to unsuspecting investors, offer high commissions, and have names that make them at least appear safe.

Products Are Misleading

These products often have misleading names such as “principal protection,” “capital guarantee,” “absolute return,” “minimum return” or similar terms, they are not risk-free.

As a preliminary matter, investors will receive principal protection from the issuer they hold these notes until maturity. However, the date of maturity, sometimes as much as 30 years, or whether the issuer is solvent at maturity is another matter.

If an investor needs to cash out their notes before maturity, this might not be possible if no secondary market to sell your note exists and the issuer refuses to redeem it. Even where a secondary market exists, the note may be quite illiquid and the investor could get substantially less than what they paid for these “structured” products.

Structured Note Often Under-Perform

As broker’s are quick to point out, structured notes with principal protection have the “potential” to outperform the total interest payment that would be paid on typical fixed interest rate bonds. However, some do not point out that these notes also might under-perform a typical fixed interest rate bond and could earn no return for the entire term of the note. Also, structured notes with principal protection may have hidden or imputed costs that can be relatively high and difficult to understand.


In December 2009, FINRA and the SEC’s Office of Investor Education and Advocacy issued an Alert to help make investors aware of these risks.

Structured notes with principal protection typically include an interest rate with an option based upon the price of a derivative product including stocks. In some cases, if the value of the securities goes up, you get your interest, but your upside potential is limited. If the value of the linked derivative product goes down, sometime you get stuck with the underlying asset and can lose all or most of your money.

The bottom line for investors is that structured notes with principal protection can have complicated pay-out structures that can make it hard to accurately assess their risk and potential for growth.

In addition, depending on how the note is structured, the distinct possibility exists that you could tie up your principal for upwards of a decade with the possibility of no profit on your initial investment.

Firms’ Responsibility of Product Suitability

NASD Rule 2310 requires that, before recommending the purchase or sale of a security, firms must have a reasonable basis for determining that the product is suitable for at least some investors. To make this determination, firms must perform adequate due diligence, which includes carefully reviewing and understanding the risks, costs, terms and conditions of the product being offered. Rule 2310 also requires that, before executing a recommended transaction, a firm must make reasonable efforts to obtain information concerning the customer’s financial status, tax status, investment objectives and “such other information used or considered to be reasonable by such member or registered representative in making recommendations to the customer.”

SEC Permanently Barred David G. Brouwer

On August 29, 2011, the U.S. Securities & Exchange Commission entered an Order permanently barring David G. Brouwer, formerly associated with Great American Advisors of Homestead, Florida from association with any member in any capacity, and ordered him to pay restitution because he failed to disclose certain material risks associated with equity-linked notes that he recommended as investments to certain customers. The SEC also found that Brouwer told customers that the equity-linked notes were safe when in fact they were not and failed to disclose certain of the investment’s material risks. Brouwer failed to adequately disclose that there was a possibility that the equity-linked notes would convert into the underlying securities at a value less than the invested principal.

If you have suffered losses as a result of an investment made by the recommendation of your stockbroker or investment professional in “Equity Linked,” “Principal Protected,” or other Structured Notes, you may have a viable legal claim and ought to consult with a lawyer.

Guiliano Law Group

Our practice is limited to the representation of investors. We accept representation on a contingent fee basis, meaning there is no cost to you unless we make a recovery for you. There is never any charge for a consultation or an evaluation of your claim. For more information, contact us at (877) SEC-ATTY.

For more information concerning common claims against stockbrokers and investment professionals, please visit us at