Structured products, including reverse convertibles—fee-based, fixed income products—can pose supervisory challenges for firms. When it comes to matters of suitability, as evidenced by a 2017 examination of what is known as the Fiduciary Duty Rule, which expressly requires financial advisers to act in the best interests of their clients in retirement accounts, such as IRAs or 401(k)s, structured products often fail to make the grade.
In November 2017, the Department of Labor opted to delay enforcement of portions of the retirement account-oriented best-interests fiduciary rule from January 2018 to July 2019. Cue Goldman Sachs' push to sell more structured notes. Having already allowed TD Bank and Wells Fargo to push its products, Goldman Sachs has recently sought to hire additional personnel in its structured products department.
As the number one issuer of structured notes, Goldman Sachs' structured product and reverse convertible sales may nonetheless be challenged by regulators; according to Fortune, for instance, regulators have already begun cracking down on complex product sales, such as a $15 million settlement reached between the SEC and UBS Financial Services after investigators charged UBS with subjecting at least 8,700 customers to unsuitable recommendations of $548 million-worth of reverse convertible note products.
Merrill Lynch found itself at the receiving end of a $5 million fine from FINRA after the regulator found "negligent disclosure failures" related to Merrill Lynch's structured note sales.
Meanwhile, the North American Securities Administrations Association recently identified promissory notes as the number one threat to investors, ahead of Ponzi schemes and affinity fraud, while FINRA listed another structured product, structured and buffered annuities, in its 2017 Risk Control Assessment Glossary. FINRA's chief concerns? Suitability, misrepresentations, and omissions of material fact, including a "buyer beware" mindset that could result in excessive fees, or a move toward high-commission products unsuitable for the investor.
For example, one analyst reviewed a 15-year note from Goldman Sachs, finding "real liquidity risk and the real risk of no interest payments for a lengthy period of time," which may not be suitable for retirement account clients; said BestCashCow, "they are very risky and aren't for everyone. Even the most aggressive investors should therefore keep a portfolio that is much more skewed towards cash accounts and very short term CDs," while flat-out recommending that certain structured products "be categorically avoided in all circumstances."
Another analysis posited that a structured note's complexity "can make it easy to stack the deck against the investor," with a destructive capacity that can be exacerbated by delayed enforcement of DOL's "best interests of the client" fiduciary rule for retirement accounts, which allows financial advisers to continue the practice of recommending high-fee products that may be unsuitable for investors.
We previously obtained a FINRA arbitration award against Wells Fargo for losses related to reverse convertibles and resolved many other cases involving structured products for our clients.
If you have invested with Goldman Sachs or another firm in reverse convertibles or other complex structured products that were unsuitable in light of your risk tolerance preferences and investment objectives, or were sold to you using misleading sales materials or statements that misrepresented or omitted key material facts, such as risk-laden product features including illiquidity and delayed interest payments or high-fees and commissions, which has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.