Bank of America Merrill Lynch’s (“Merrill Lynch”) brokerage unit offered Strategic Return Notes (“SRNs”) to customers, resulting in losses of as much as 95% of the principal invested. First issued in November 2010 and maturing November 27, 2015, the SRNs were designed to be linked to Merrill Lynch’s own proprietary volatility index (the “VOL”) which was designed to calculate the volatility of the S&P 500 Index. The SRNs, which were issued at $10 per share, ultimately matured at just $0.50 per share. Thus, investors in Merrill Lynch’s proprietary SRN’s were subjected to an enormous 95% loss on their principal investment.
In recent years, many investors have been solicited by their financial advisor to purchase so-called structured notes, which are often presented to customers as a higher-yielding, but still relatively safe alternative to fixed-income investments such as bonds. Structured notes are issued and backed by financial institutions. As hybrid products containing both a bond component and an embedded derivative, structured notes are designed to provide an investor with a return based on an equity index (or some other benchmark), as opposed to an interest rate typically associated with a traditional bond investment.
In theory, a structured note is supposed to provide an investor with an opportunity to earn enhanced income (in excess of the very low interest rates offered in the current environment on most bond investments), while also providing some downside cushion. In practice, however, many structured notes engineered by various investment banks and sold by their brokers have proved to be horrendous investments.
With respect to their pricing, Merrill Lynch accurately disclosed two of the fees surrounding the SRNs: a 2% upfront fee on the initial investment and a 0.75% annual internal fee. Significantly, however, Merrill Lynch allegedly failed to disclose the “execution factor” associated with its SRNs. In fact, in June 2016, the Securities and Exchange Commission (“SEC”) levied a $10 million fine against Merrill Lynch in connection with what the SEC alleged to be Merrill’s failure to “… adequately disclose a third cost included in the volatility index… that imposed a cost of 1.5 percent of the index value each quarter.”
Investments in structured products including Merrill Lynch’s SRNs have increased drastically in recent years, with hundreds of billions in structured product sales occurring in the past decade, alone. These investments are extremely complex and difficult to understand, and accordingly, are likely unsuitable for the average retail investor.
When a financial advisor recommends an investment to a customer, the broker and his or her firm has a duty to first conduct due diligence on the investment. In addition, pursuant to the rules and regulations set forth by the Financial Industry Regulatory Authority (“FINRA”), the financial advisor, and by extension his or her firm, must seek to ensure that they conduct a suitability analysis in order to determine if the investment being recommended is suitable for the investor in light of certain factors, including the customer’s age, risk tolerance and stated objectives, net worth and income, and degree of sophistication with investing.
Investors who suffered losses as a result of advisor-recommended purchases of structured notes may be able to recover losses sustained in FINRA arbitration if the recommendation lacked a reasonable basis. Investors may contact Law Office of Christopher J. Gray, P.C. at (866) 966-9598 or firstname.lastname@example.org for a no-cost, confidential consultation.