Structured Notes Attorneys — Bakhtiari & Harrison

What are structured notes?

A structured note is a debt obligation issued by a financial institution — typically a major bank — whose return at maturity depends on the performance of an underlying asset, index, commodity, currency, or basket of securities. Unlike a conventional bond that pays a fixed or variable interest rate, a structured note’s return is “structured” through the use of derivatives embedded in the note’s design. The underlying performance formula can be as simple as a percentage participation in an equity index, or as complex as a multi-factor payoff formula linking the note’s return to the worst-performing of three technology stocks.

Structured notes are issued in virtually limitless varieties — principal-protected notes, barrier notes, auto-callable notes, reverse convertibles, market-linked CDs, and equity-linked notes, among others. What they share in common is complexity that makes them difficult for retail investors to evaluate independently, and a fee structure that generates substantial revenue for the issuing bank and the selling broker-dealer while obscuring the true cost to the investor.

How structured notes are misrepresented

• Principal protection misrepresentation: many structured notes are marketed as “principal-protected” — implying the investor cannot lose their initial investment. In reality, principal protection is only as good as the creditworthiness of the issuing bank. If the issuer defaults, the investor loses principal regardless of market performance. The 2008 Lehman Brothers structured note collapse illustrated this risk dramatically.
• Complexity concealing fees: the cost of a structured note is not disclosed as a fee — it is embedded in the product’s structure through the pricing of the embedded derivatives. Investors cannot readily determine what they paid for the product. Independent analysis typically shows that the embedded cost of a structured note ranges from 2% to 8% of principal — far exceeding what investors believe they paid.
• Liquidity misrepresentation: structured notes are typically illiquid. They are not exchange-traded and can only be sold through the secondary market maintained by the issuing bank — at prices set by the issuer, which frequently represent significant discounts to the note’s stated value.
• Risk disclosure failures: the barrier provisions, worst-of structures, and auto-call features that determine a structured note’s actual risk profile are buried in prospectus supplements that few retail investors read or understand. Brokers who recommend structured notes without clearly explaining these features violate their suitability obligations.

Common structured note types and their risks

Principal-protected notes

Marketed as safe because they return principal at maturity — but only if the issuer remains solvent. For notes with long maturities (5-10 years), the opportunity cost of accepting below-market returns in exchange for “protection” is significant.

Reverse convertible notes

Pay an above-market coupon in exchange for giving the issuer the right to repay principal in stock rather than cash if the underlying stock falls below a barrier level. The elevated coupon obscures the fact that the investor has written a put option on the stock — taking on full downside risk below the barrier.

Barrier notes and worst-of structures

Linked to the worst-performing of two or three stocks. If any one stock falls below a barrier level, the investor loses principal proportionally to the worst-performing stock. The multi-asset structure creates correlated risks that are rarely explained to retail investors.

Auto-callable notes

Automatically mature early if the underlying asset reaches a specified level — cutting off the investor’s potential upside while leaving full downside exposure intact if the asset falls below the barrier.

Federal securities law protections for structured note investors

Structured note investors have claims under SEC Rule 10b-5 and Section 10(b) of the Securities Exchange Act of 1934 for material misrepresentations and omissions. Sections 11 and 12 of the Securities Act of 1933 provide additional remedies when structured notes are sold in registered offerings containing material misstatements. These federal claims are available to investors in all 50 states and can be pursued alongside FINRA arbitration claims against the selling broker-dealer.

Frequently asked questions — structured notes

My broker said my structured note was “principal protected” — what does that actually mean?

Principal protection in a structured note means the issuing bank has promised to return your principal at maturity — provided the bank is still solvent. It does not mean your investment is insured, guaranteed by any government entity, or protected against issuer default. In 2008, investors in Lehman Brothers structured notes lost their principal when Lehman filed for bankruptcy, regardless of the principal protection provisions in their notes.

How do I know what I actually paid for my structured note?

You cannot determine the cost of a structured note from its stated terms — the cost is embedded in the derivative pricing and is not disclosed as a fee. Independent analysis of structured note pricing typically reveals embedded costs of 2-8% of principal. Bakhtiari & Harrison works with financial experts who can analyze the embedded cost of any structured note as part of its claim evaluation.

Can I sell my structured note before maturity?

Structured notes are typically illiquid. They are not exchange-traded and can only be sold in the secondary market maintained by the issuing bank, at prices the bank sets — which frequently represent significant discounts to the stated note value. If your broker represented your structured note as liquid or easily sellable, that misrepresentation may be independently actionable.

What is the statute of limitations for a structured note claim?

Under FINRA Rule 12206, claims must be filed within six years of the triggering event. State law claims may have shorter limitations periods depending on your state of residence. Contact Bakhtiari & Harrison promptly — time limits are strictly enforced.

For a full overview of the firm’s investment product failure practice, visit the Product Failure page.

Contact a structured notes attorneys — free consultation

Contact Bakhtiari & Harrison for a free, confidential consultation. Our FINRA attorneys evaluate every potential investor claim at no charge. Investor cases are handled on a contingency fee basis — no recovery, no fee.

Investor cases are handled on a contingency fee basis — no recovery, no fee.

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