On August 23, 2019, an extensive article in The Wall Street Journal (“UBS Faces Client Backlash over Options Strategy”), exposed a complex investment strategy pitched as low-risk by stockbrokers at UBS Group AG (NYSE – UBS) that has triggered a backlash from clients of its securities unit.

The strategy, called Yield Enhancement Strategy, or “YES,” has reportedly already generated at least $60 million in losses for clients and dozens of customer complaints.

The strategy involved the use of several option trades and borrowing, according to marketing materials, and faltered when volatility in the stock and bond markets intensified last year.

Although UBS’ marketing materials were reported to have stated that the “YES” program sought to “limit exposure” to extreme market moves, “in just one month late last year, the strategy had losses exceeding 13%” according to the WSJ – a decline which highlights the risks in highly leveraged financial investments during periods of heightened volatility in the markets.

According to the WSJ, “the YES strategy typically involved putting on four different options trades – relating to an underlying stock index, such as the S&P 500 – at different strike prices but with the same expiration date. The strike price can be the point at which the owner of a “call” option can buy or the owner of a “put” option can sell the underlying security. The sale of short-term, “out-of-the-money” puts and calls on an index – a situation when the underlying price of the index isn’t at or better than the option’s strike price – was coupled with the purchase of short-term below-market puts and above-market calls on the index to mitigate risk, UBS marketing materials show.

When the S&P 500 was relatively stable, for example, the options generated a positive return, but when the index gyrated, losses resulted. Because the strategy made use of borrowed funds – as much as $5 were borrowed and invested for every dollar put in by the client – investors had to either put up additional money or have their positions sold at a loss when the trades went against them.”

If you are an individual or institutional investor who has any concerns about your Yield Enhancement Strategy investments with UBS, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

As reported by Bloomberg on July 16, 2019, a $693 million loan that Clover Technologies took to the market just 5 years ago recently lost about a third of its value. This collapse was surprising to insiders who trade corporate loans.

Clover had been operating since 1996 when it was acquired by Golden Gate which followed an usual path of private equity buyouts – it piled debt on the underlying company to extract dividends.

Using the leveraged loan market as a wallet, the company took loans that funded dividend payments totaling at least $278 million – $100 million in 2013 and $178 million in 2014. Clover also asked lenders for a further $100 million in 2014 to pay for an acquisition.

Those loans, as is typically done, were bought mostly by mutual funds and collateralized loan obligations (“CLOs”), which bundle such leveraged debt into higher-rated securities that are pitched to more risk-averse investors.

There’s been little trouble finding buyers for CLOs in recent years. With yields on high-grade bonds at low rates across the globe, investors have been hungry for the juicy returns that these loans offer and, more and more, tend to overlook the lack of protection afforded.

Although Clover’s loan isn’t large by Wall Street standards, its decline set off alarm bells that regulators have been sounding for months. In a market where trading can be thin – and at a time when illiquidity is suddenly becoming a prominent concern in credit circles – the episode shows how loans to highly leveraged companies can quickly implode when fortunes change.

If you are an individual or institutional investor who has any concerns about your leveraged loan investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On July 1, 2019, in Regulatory Notice 19-21, the Financial Industry Regulatory Authority (“FINRA”) announced that it was establishing higher strategy-based margin requirements for exchange-traded notes (“ETNs”) and options on ETNs in light of the complex nature of these products and their attendant risks.

An ETN is an unsecured obligation of its issuer, typically a bank or other financial institution. However, ETNs are different from typical corporate bonds as, for example, they do not pay interest and pay principal based on the performance of a reference index or benchmark.

For this reason, an investment in an ETN can have a return similar to an investment in an exchange-traded fund (“ETF”) that is designed to track the performance of the index or benchmark referenced by the ETN.

Though these products are also structured products that trade on an exchange, they differ in a few respects. For example, ETFs are generally equity products: an investor in an ETF, which is typically a registered investment company, owns shares of a fund, which represents an ownership interest in an underlying portfolio of assets. In contrast, as noted above, ETNs are unsecured debt that do not reflect ownership of an underlying portfolio of assets.

This feature exposes holders of an ETN to the creditworthiness of the issuer in addition to the risk of the reference index or benchmark.

ETNs may also have “knock-out” features or give their issuers early redemption rights, which can cause the return on an ETN investment to further diverge from the return on an investment in an ETF that tracks the same index.

The Securities & Exchange Commission has identified several potential risks of investing in ETNs which include the following:

Complexity – You and your broker should take time to understand the manner in which the reference index or benchmark is calculated, including the fees that are included in either the reference index or the calculation of the value of the ETN. Compare and contrast the ETN to other investment products offering a similar investment strategy.

Credit Risk (Issuer Default) – You should be aware that when you purchase an ETN you are subject to the creditworthiness of the issuing financial institution and would be a creditor if the issuer defaults on payments due.

Market Risk – In addition to the credit risk of the issuer, ETNs also expose investors to the performance risk of the reference index or benchmark.

Leverage – Leveraged, inverse, or inverse-leveraged ETNs reset on a daily basis their exposure to the leveraged, inverse, or inverse-leveraged exposure stated in the prospectus, meaning that all investors receive an equal amount of leveraged, inverse, or inverse-leveraged exposure. As a result, investors holding such ETNs for more than one day should not expect to receive returns proportional to the exposure stated in the prospectus. The difference can be significant. Consequently, leveraged, inverse, or inverse-leveraged ETNs are not typically used as buy-and-hold instruments.

Price Volatility (Market Price versus Indicative Value) – ETNs can trade at premiums or discounts to their indicative value, especially in instances in which the issuer has suspended further note issuances. If you are considering purchasing ETNs, you should compare market prices against indicative values.

Liquidity Risk – There is a risk that if you need to cash out your investment, you may not be able to sell the ETN immediately and at a price that you would consider reasonable (for example, you may have to sell the ETN at a lower price than if you were able to wait to liquidate your investment). This is the case for most illiquid securities and the liquidity of ETNs varies significantly. For example, some ETNs have daily volume in excess of a million notes, while others may have little trading activity over several days. You should consider your overall timeframe for the investment, including how quickly you may need to sell the ETN.

If you are an individual or institutional investor who has any concerns about your exchange-traded note (ETN) investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Many investors have suffered losses in their investment in the Preferred Stock of Maiden Holdings. When this Preferred Stock was initially sold by Merrill Lynch and other brokerage firms, most investors paid $25 per share, and it has currently been trading at approximately $5 or less per share, for a current loss of approximately 80%.

Most investors were not told by their Merrill Lynch or other advisor of the significant risks associated in an investment in Maiden Holdings. The Common Stock of Maiden Holdings has recently been trading for under $1 per share.

Since 1991, Maddox Hargett & Caruso, P.C. has represented the interests of individual and institutional investors in cases involving financial losses due to investment fraud, stockbroker misconduct or professional negligence.

If you are an individual or institutional investor with concerns about your investment in the Preferred Stock of Maiden Holdings, please contact Mark Maddox at (317) 598-2040 for a free confidential consultation regarding your claims.

On January 22, 2019, FINRA released its “2019 Risk Monitoring and Examination Priorities Letter” which identifies topics that FINRA will focus on in the coming year.

One of FINRA’s top priorities in 2019, that was identified in this letter, is the protection of senior investors which most often refers to those individuals who are 65 years of age or older as well as investors who are retired or approaching retirement.

As noted by FINRA, this issue “remains a top priority for FINRA and we will continue to focus on how firms are protecting such persons from fraud, sales practice abuses and financial exploitation.”

In addition, “FINRA will assess firms’ supervision of accounts where registered representatives serve in a fiduciary capacity, including holding a power of attorney, acting as a trustee or co-trustee, or having some type of beneficiary relationship with a non-familial customer account. In particular, we are concerned about registered representatives using their role as a fiduciary to take control of trusts or other assets and direct funds to themselves.”

As a key component of its regulatory oversight role, “FINRA will assess the supervisory systems firms employ to place heightened scrutiny over such accounts.”

If you are a senior investor who has any concerns about your investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On January 22, 2019, FINRA released its “2019 Risk Monitoring and Examination Priorities Letter” which identifies topics that FINRA will focus on in the coming year.

As always, suitability remains one of FINRA’s top priorities in the coming year.

Some of the specific areas on which FINRA may focus in 2019 include: (1) deficient quantitative suitability determinations or related supervisory controls; (2) overconcentration in illiquid securities, such as variable annuities, non-traded alternative investments and securities sold through private placements; and (3) recommendations to purchase share classes that are not in line with the customer’s investment time horizon or hold for a period that is inconsistent with the security’s performance characteristics (which could include, for example, a recommendation to purchase and hold a security that is intended for short-term trading or to engage in short-term trading in products designed primarily for long-term holding).

In addition, as the exchange-traded product (ETP) market continues to grow with novel and increasingly complex products, FINRA will evaluate whether firms are meeting their suitability obligations and risk disclosure obligations when recommending such products. These include leveraged and inverse exchange-traded funds (ETFs), floating-rate loan ETFs (also known as bank-loan or leveraged loan funds) and mutual funds that invest in loans extended to highly indebted companies of lower credit quality.

FINRA also noted that it remains concerned about securities products that package leveraged loans (e.g., collateralized loan obligations). Although these products are typically sold via private placement to qualified institutional buyers, firms that may be selling them to retail investors will be subject to review as to how such firms are supervising such transactions to ensure their compliance with applicable sales restrictions.

If you are an individual or institutional investor who has any concerns about your investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Selecting a good financial advisor is one of the most important financial decisions life requires you to make. If you blow this one, it can cost you and your family lots of money and require you to work well into your golden years. Getting this decision right will help you live happily ever after.

At the beginning of the process, you should be introspective and try to honestly evaluate yourself, your abilities, and the time you are willing to devote to your financial affairs. Then decide how much advice you need. If you are a somewhat knowledgeable financial person, lawyer or CPA, perhaps all you need is to consult with an advisor periodically on an hourly basis to fill in the gaps of your knowledge (like estate or tax planning) or to use as a sounding board for your own investment ideas. If you go this route, you will need to be very attentive to your financial affairs and make notes of questions to be asked at your next consultation. Be prepared to spend $250-$500 per hour for this type of relationship.

Perhaps you are someone who doesn’t know or want to know much about investing, and don’t have the time to devote to regularly watching your investments every week. You need an asset manager. There are lots of different names for potential asset managers that include stockbrokers, investment advisors, financial planners, and insurance agents. It is very important for you to understand the types of professional licenses and designations held by your prospective advisor. For example, someone who is only an insurance agent can only sell you insurance products to address your financial needs. In many investment situations, you don’t need another insurance product but that is all the agent can sell. Investment advisors and stockbrokers can usually sell you a wider variety of investment products and advice, that in theory should be more appropriate for you than just insurance products.

The biggest sin regularly committed in the investment business is not being totally honest with the investor as to how the advisor is compensated. Why the mystery? Perhaps someone is concerned that if the investor is clearly told how an advisor is paid, you will question whether a recommendation is more in the interest of the advisor than the investor. If you are doing your job as a careful investor, you will ask about compensation in your first meeting with a prospective advisor (and almost every subsequent meeting) and always keep an eye on it to confirm what you have been told. Here are the options. If you are a somewhat sophisticated person and only need the hourly advice discussed above, then you pay the agreed to hourly fees. If you have sought a comprehensive financial plan from an advisor, you might pay a fixed fee between $2,500-$10,000 for such a plan. If you are buying one or more investment products from an advisor, you might pay a commission for each transaction. Commissions vary widely and can be as low as $10 per trade at a discount brokerage firm to as high as 10% of the principal dollars invested. Know what you are paying on each transaction! Many investors have experienced severe heartburn as a result of advisors making recommendations to line their own pockets with commissions at the expense of the investor. Finally, the industry trend for many years is to manage assets on a fee-based model. Depending upon the total dollars you have to invest, this annual fixed fee can be as low as half of one percent to two percent of assets under management. The fee-based approach usually puts the investor and advisor on the same side of the table and results in much less funny business perpetrated by advisors. This approach should be seriously considered by most investors with significant assets.

Before doing business with a prospective financial advisor, you must check them out. First, go to the website www.brokercheck.com and look for any negative signs. A clean record is a good thing. Red flags should arise if you see a history of customer complaints, personal bankruptcies filed by the advisor or various liens or judgments. Prior regulatory actions should also cause you to look elsewhere for advice. You should also check the advisor out on the internet. Go to your favorite search engine and see what comes up.

Finally, you must feel like you have a good fit with the advisor. Listen to your gut. If there is something in an initial or subsequent meeting that causes you to wonder if this is the right person for you, go somewhere else. Someone who talks way over your head and doesn’t connect shouldn’t be your advisor. There are too many other fine choices in this industry. I hope you find one.

On December 20, 2018, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (“OCIE”) announced its 2019 examination priorities. OCIE publishes its exam priorities annually to promote transparency of its examination program and provide insights into the areas it believes present potentially heightened risk to investors or the integrity of the U.S. capital markets.

As noted by the SEC in this report, in 2019 “particular emphasis” will be on “matters of importance to retail investors” including the protection of retail investors in the following areas of concern:

Senior Investors and Retirement Accounts and Products: OCIE will conduct examinations that review “how broker-dealers oversee their interactions with senior investors, including their ability to identify financial exploitation of seniors. In examinations of investment advisers, OCIE will continue to review the services and products offered to seniors and those saving for retirement. These examinations will focus on, among other things, compliance programs of investment advisers, the appropriateness of certain investment recommendations to seniors, and the supervision by firms of their employees and independent representatives.”

Proper Disclosure of Fees & Expenses: OCIE will conduct examinations that review “firms with practices or business models that may create increased risks of inadequately disclosed fees, expenses, or other charges. With respect to mutual fund share classes, OCIE will continue to evaluate financial incentives for financial professionals that may influence their selection of particular share classes. In addition, OCIE remains focused on investment advisers participating in wrap fee programs, which charge investors a single bundled fee for both advisory and brokerage services. Continued areas of interest include the adequacy of disclosures and brokerage practices.”

Conflicts of Interest: OCIE will conduct examinations that review firms that “provide incentives for financial professionals to recommend certain types of products and services” and advisers who “in some cases utilize services or products provided by affiliated entities.”

Mutual Funds and Exchange Traded Funds: OCIE will conduct examinations that review “mutual funds and exchange traded funds (ETFs) which are the primary investment vehicles for many retail investors” and “will assess industry practices and regulatory compliance in various areas that may have significant impact on retail investors” including “risks” that are associated with “index funds that track custom-built or bespoke indexes; ETFs with little secondary market trading volume and smaller assets under management; funds with higher allocations to certain securitized assets; and funds with aberrational underperformance relative to their peer groups.”

If you are an individual or institutional investor who has any concerns about your accounts or investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that failed to conduct reasonable diligence on private placements and failed to meet their supervisory requirements – especially in those circumstances when firms have an obligation to conduct a “reasonable investigation” through evaluation of the issuer and its management; the business prospects of the issuer; the assets held by or to be acquired by the issuer; the claims being made; and the intended use of proceeds of the offering.

In particular, FINRA has observed instances where some firms’ reasonable diligence was not sufficient in scope or depth to be considered a “reasonable investigation of the issuer and the securities.”

According to FINRA, these regulatory examinations revealed that “some firms failed to perform reasonable diligence on private placement offerings prior to recommending the offerings to retail investors” and that, “in some instances, firms performed no additional research about new offerings because they relied on their experience with the same issuer in previous offerings.”

In other instances, FINRA noted that “some firms reviewed the offering memorandum and other relevant offering documentation, but did not discuss the offering in greater detail with the issuer or independently verify, research or analyze material aspects of the offerings. FINRA also observed that some firms did not investigate red flags identified during the reasonable diligence process.”

Finally, FINRA stated that “where some firms obtained and reviewed due diligence reports provided by due diligence consultants, experts or other third-party vendors, they sometimes did not independently evaluate the third parties’ conclusions, respond to red flags or significant concerns noted in the reports, or address concerns regarding the issuer or the offering that were
apparent outside the context of the report.” Of equal concern was the fact that “some firms used third-party due diligence reports that issuers paid for or provided in their due diligence analysis. While some of these reports provided valuable and relatively objective information, in some cases, firms did not consider the related conflicts of interest in their evaluation and assessment of the reports’ conclusions and recommendations.”

If you are an individual or institutional investor who has any concerns about your private placement investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

 

On December 7, 2018, the Financial Industry Regulatory Authority (“FINRA”) issued a comprehensive report (“Report on FINRA Examination Findings”) which “focuses on selected observations from recent examinations that FINRA considers worth highlighting because of their potential significance, frequency, and impact on investors and the markets.”

Among the issues discussed in this report were significant concerns about some firms that “maintained customer accounts that were concentrated in complex structured notes or sector-specific investments, as well as illiquid securities, such as non-traded real estate investment trust (“REITs”), which were unsuitable for customers and resulted in significant customer losses.”

A concentrated account is commonly considered to be an account which contains a significant percentage of its assets in one product, type of product or sector which exposes the account to excessive amounts of risk – especially during periods of extreme volatility as the markets have recently experienced in greater frequency.

In particular, FINRA noted that “some registered representatives recommended structured notes or sector-specific investment strategies to customers who may not have had the sophistication to understand their features and without considering the customer’s individual financial situation and needs, investment experience, risk tolerance, time horizon, investment objectives, liquidity needs and other investment profile factors.”

Some of the “recommendations involved illiquid securities with limited price transparency, which made it difficult for investors to know the true value of their investment and led them to believe that their investments would not fluctuate in value. In some instances, firms did not have
procedures or systems reasonably designed to identify and supervise the concentration of such products in customers’ accounts.”

If you are an individual or institutional investor who has any concerns about your concentrated investments with any brokerage firm, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).