FLORIDA FIXED-INCOME INVESTORS--WATCH OUT FOR "DEATH PUTS" IN CDS AND STRUCTURED NOTES!

With interest rates stuck at record lows, and retirees or those on the brink of retirement looking for higher yields, Wall Street has capitalized on this dilemma by selling an array of alternative products like "structured notes" that promise higher yields but come with higher (often undisclosed) risks, and by marketing dividend stocks as alternatives to bonds, when, in fact, they are riskier than bonds.

A recent article in the Wall Street Journal by columnist Kelly Greene highlighted another such alternative investment: bonds and certificates of deposit with "death puts." Wall Street is marketing them as a way to allow investors to achieve higher yields without taking on significantly more risk ("Retirees: Pump Up Those Yields," by Kelly Greene, Wall Street Journal).

Death puts simply allow heirs to redeem bonds and certificates of deposit at face value, meaning they get back all the money that originally was invested. The fee paid for that feature is 0.125%.

The death put is supposed to give a senior investor the comfort to buy longer-term, higher-yielding notes and brokered CDs that otherwise might not repay their heirs the entire principal invested, if the heirs sought to redeem them prior to maturity. It should be noted that it is only the heirs, and not the investors, who can use the death put feature. If an investor needed to cash out of a bond or CD with the death benefit feature before maturity, he or she would only get market value, which could be lower than face value if interest rates increase.

The biggest risk is that the issuer of the death put may default on the payments. Most of the issuers of bonds with death puts are financial-services companies, some of whom are on shaky financial ground. The bankruptcy of Lehman Brothers brought home this risk to many purchasers of its "100% Principal Protected" structured notes, which lost almost all of their principal value.

A second risk is the fact that many such notes and CDs are callable prior to maturity, which exposes the investor to interest rate risk should the bond be called and they have to reinvest the proceeds at a lower interest rate.

A third set of risks involves restrictions placed on the availability of the death put. Some bonds must be held for at least six months before the death put can be used. Others limit the amount that a bondholder can redeem at one time or on the number of redemptions allowed in a given year. Most companies, including GE Capital and Goldman Sachs, have a six-month restriction.

Another potential downside is the fact that the death put might not be worth anything if interest rates remain as low as they are now. As the article explains, "if you died tomorrow, your heirs probably wouldn't need to use a death put to redeem bonds at par value, because prices are so high that the bonds likely would be worth at least the face value in the open market."

About $12 billion in bonds with death puts have been issued each year for the past three years. The number is expected to grow about 10% in 2012. They are typically sold through brokerages including Merrill Lynch, Charles Schwab and Fidelity Investments. Death puts are most commonly used on brokered CDs - called a "survivor's option."

As with all bells and whistles that are added to plain vanilla investments, there is a price for death puts and the price is determined by an actuary or other expert employed by the issuer, who uses sophisticated mathematical formulae to set the price. Unless the investor has, or is able to employ, the same expertise, it will be impossible for the investor to tell whether or not the death benefit feature is a good deal or a rip-off. The investor will have to trust Wall Street. Unfortunately, a number of Wall Street firms have repeatedly demonstrated that they put their own interests ahead of their clients and are not worthy of trust.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

FINRA FINES MORGAN STANLEY, CITIGROUP, WELLS FARGO, AND UBS $9.1M OVER LEVERAGED AND INVERSE ETFS

Wells Fargo & Co. (WFC), UBS AG (UBSN), Morgan Stanley (MS), and Citigroup Inc. (C) have consented to pay a combined $9.1 million to settle Financial Industry Regulatory Authority claims that they did not adequately supervise the sale of leveraged and inverse exchange-traded funds in 2008 and 2009. $7.3 million of this is fines. The remaining $1.8 million will go to affected customers. The SRO says that the four financial firms had no reasonable grounds for recommending these securities to the investors, yet they each sold billions of dollars of ETFs to clients. Some of these investors ended up holding them for extended periods while the markets were exhibiting volatility.

It was in June 2009 that FINRA cautioned brokers that long-term investors and leveraged and inverse ETFs were not a good match. While UBS suspended its sale of these ETFs after the SRO issued its warning, it eventually resumed selling them but doesn't recommend them to clients anymore. Morgan Stanley also had announced that it would place restrictions on ETF sales. Meantime, Wells Fargo continues to sell leveraged and inverse ETFs. However, a spokesperson for the financial firm says that it has implemented enhanced procedures and policies to ensure that it meets its regulatory responsibilities. Citigroup also has enhanced its policies, procedures, and training related to the sale of these ETFs. (FINRA began looking into how leveraged and inverse ETFs are being marketed to clients in March after one ETN, VelocityShares Daily 2x VIX Short-Term (TVIX), which is managed by Credit Suisse (CS), lost half its worth in two days.)

The Securities and Exchange Commission describes ETFs as (usually) registered investment companies with shares that represent an interest in a portfolio with securities that track an underlying index or benchmark. While leveraged ETFs look to deliver multiples of the performance of the benchmark or index they are tracking, inverse ETFs seek to do the opposite. Both types of ETFs seek to do this with the help of different investment strategies involving future contracts, swaps, and other derivative instruments. The majority of leveraged and inverse ETFs "reset" daily. How they perform over extend time periods can differ from how well their benchmark or underlying index does during the same duration. Per Bloomberg, leveraged and inverse ETFs hold $29.3 billion in the US.

For investors, it is important that they understand the risks involved in leveraged and inverse ETFs. Depending on what investment strategies the ETF employs, the risks may vary. Long-term investors should be especially careful about their decision to invest in leveraged and inverse ETFs.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.

WELLS FARGO, CITIGROUP, MORGAN STANLEY, UBS FINED FOR IMPROPER SALES OF HIGH-RISK ETFS NATIONWIDE

The Financial Industry Regulatory Authority (FINRA) announced that it ordered Wells Fargo Advisors, Citigroup Global Markets, Morgan Stanley, and UBS Financial Services to pay more than $9.1 million for failure to supervise and failure to have a reasonable basis for recommending selling leveraged and inverse exchange traded funds. Each of the four firms sold billions of dollars of these leveraged and inverse exchange traded funds.

The payments consist of more than $7.3 million in fines and $1.8 million in restitution to customers who purchased the leveraged and inverse exchange traded funds. The breakdown is as follows:

• Wells Fargo - $2.1 million fine and $641,489 in restitution
• Citigroup - $2 million fine and $146,431 in restitution
• Morgan Stanley - $1.75 million fine and $604,584 in restitution
• UBS - $1.5 million fine and $431,488 in restitution

Brad Bennett, FINRA Executive Vice President and Chief of Enforcement, was quoted as saying: "The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers. Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

In addition, FINRA found that the firms' registered representatives made unsuitable recommendations of leveraged and inverse exchange-traded funds to some customers with conservative investment objectives and/or risk profiles, some of whom held them for extended periods during January 2008 through June 2009 when the markets were volatile.

Leveraged and inverse exchange-traded funds have risks not found in traditional exchange traded funds. Those risks flow from the daily reset, leverage and compounding of leveraged and inverse exchange traded funds, which caused them to differ significantly from the performance of the underlying index or benchmark when held for longer periods of time. That was particularly true in the volatile markets that existed during January 2008 through June 2009.

The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Mr. Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. Our law firm is devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.