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Home > Blog > Monthly Archives: December 2018

Monthly Archives: December 2018

Volatility-Linked Products are Raising Concerns with Regulators

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 the suitability of investments that are being recommended to retail investors.

In fact, FINRA observed situations where “registered representatives did not adequately consider the customer’s financial situation and needs, investment experience, risk tolerance, time horizon,
investment objectives, liquidity needs and other investment profile factors when making
recommendations.”

In some cases, FINRA noted that “unsuitable recommendations involved complex products (such as leveraged and inverse exchange-traded products (ETPs), including exchange-traded funds (ETFs) and notes (ETNs)). In other cases, they involved overconcentration in illiquid securities, variable annuities, switches between share classes, and sophisticated or risky investment strategies.”

One of the products that was specifically discussed in this report was “volatility-linked” products that are being marketed to retail investors. As stated by FINRA, their examinations of firms indicated that, “despite prospectuses and other materials that included risk disclosures,
including explicit warnings about sales to retail customers, some firms nevertheless marketed volatility-linked products to retail customers who did not understand those products’ unique risks and made recommendations that were inconsistent with the investors’ investment profile, including risk tolerance and investment time horizon (e.g., in many of those instances, customers held the securities far longer than the holding periods – frequently one trading day – that were recommended in the product’s prospectus).”

If you are an individual or institutional investor who has any concerns about your volatility-linked 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).

INDIANA FINES LPL FINANCIAL FOR “DEFICIENCIES” IN SUPERVISION

On December 3rd, 2018, the Indiana Securities Division of the Secretary of State’s office announced that LPL Financial agreed to pay a civil penalty of $450,000 for “various deficiencies” related to supervision of its Indiana operations.

Indiana said an investigation found that LPL supervisors did not properly review a number of emails involving Indiana operations for several years. The investigation also found that LPL did not conduct annual compliance exams of its Indiana branches as required by law.

Boston-based LPL offers securities through numerous independent broker dealers across the country, including many in Indiana. If an investor has any questions about his/her dealings with LPL, or any losses in your accounts, you should contact our office for a free evaluation. We represent many individual and institutional investors in securities arbitration claims with FINRA. We are happy to give investors a no-cost, no-obligation evaluation of your specific facts and circumstances.

Does the Corporate Debt Market Signal the End of the Party on Wall Street?

On November 26, 2018, in an editorial in the New York Times (“When Blue Chip Companies Pile on Debt, it’s Time to Worry”), it was noted that “fueled by cheap credit, American corporations have been gorging on acquisitions” and that “the party may soon be over.”

In fact, in the low interest-rate environment that has persisted for the last decade, “debt issuance exploded” as “the amount of corporate bonds outstanding nearly doubled to $9 trillion, from $5.5 trillion.”

This editorial observed that “much of that surge has come in the form of bonds rated BBB, near the riskier end of the investment-grade spectrum – meaning that the money borrowed remains at some danger, albeit low, of not being paid back. There is now nearly $2.5 trillion of United States corporate debt rated in the BBB category, close to triple the amount of 2008, making up half of the investment-grade bond market. “

As interest rates rise and the economy appears to be slowing, the potential for debt default has become “a fear that has started to cause disturbing ripples in the debt and equity markets. “

One of the examples discussed in this article concerns General Electric (NYSE: GE) which has a reported $115 billion of outstanding debt, about $20 billion of which is due within a year. In October, “S&P lowered G.E.’s credit rating to BBB, and the cost of buying insurance against a default on G.E.’s bonds, so-called credit default swaps, has soared in November. That’s a sign of investors becoming nervous that G.E. might default.”

Another example is AT&T (NYSE: T) which has “about $183 billion of debt outstanding” and “is now one of the most indebted companies on the planet, thanks to its recent acquisitions of DirecTV and TimeWarner, which were paid substantially with debt. AT&T’s debt is also rated BBB, although only about $11 billion is coming due within a year.”

This editorial concludes that “there’s a lot at risk here. If these BBB-rated companies get downgraded further into ‘junk’ status — a distinct possibility if a slowing economy makes a dent in their profits or if their big acquisitions do not pay off — a vicious cycle is nearly inevitable. That means higher borrowing costs when it comes time to refinance or to obtain a new credit line and an increasing risk of default.”

If you are an individual or institutional investor who has any concerns about your fixed income 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).


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