Fred Hohensee, of Oconomowoc, Wisconsin, a stockbroker registered with Abacus Investments was recently suspended and fined in connection with the recommendation and sale of certrain structured products. (AWC No. 202307967490).
According to the AWC, Hohensee “recommended that two retail customers, one of whom was a senior, invest in eighteen structured notes without having a reasonable basis to believe the investments were in the best interest of each customer.” The letter notes that while some structured notes offer some level of principal protection, the notes in question had no principal protection, as well as a maturity of at least five years and “significant risks” disclosed in their prospectuses; this despite the fact that the customers had low risk tolerances and short term liquidity needs.
The term structured notes or “structured note with principal protection” refers to any structured product that combines a bond with a derivative component and that offers a full or partial return of principal at maturity. financial industry regulatory authorityStructured products in general do not represent ownership of any portfolio of assets but rather are promises to pay made by the product issuers. Structured notes with principal protection typically reflect the combination of a zero-coupon bond, which pays no interest until the bond matures, with an option or other derivative product whose payoff is linked to an underlying asset, index or benchmark. The investor is entitled to participate in a return that is linked to a specified change in the value of the underlying asset.
The retail market for structured notes with principal protection has been growing in recent years. While these products often have reassuring names that include some variant of “principal protection,” “capital guarantee,” “absolute return,” “minimum return” or similar terms, they are not risk-free. Any promise to repay some or all of the money invested will depend on the creditworthiness of the issuer of the note and investors could lose all of their money if the issuer of the Note goes bankrupt.
Hohensee was also found to have “recommended that each customer invest a substantial portion of their respective net worth in the structured notes despite their risks,” and he “failed to sufficiently consider these risks in light of the customers’ investment profiles and therefore lacked a reasonable basis to believe that the structured notes were in the best interest of either customer.” He allegedly earned commissions totaling $7,530 in connection with the sales of the notes, whose value “fell significantly” and 12 of which stopped paying interest. Finding that he violated Regulation Best Interest and FINRA Rule 2010, FINRA suspended Mr. Hohensee for six weeks and ordered him to pay a fine of $10,000, plus $7,530 in interest.
The Guiliano Law Group, P.C.
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