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SEC Looking at the Sale of Principal Protected Notes

The Securities and Exchange Commission (SEC) is reviewing how financial companies market principal protected notes (PPNs), according to Bloomberg news. The SEC’s inquiry is focused on how companies describe the products’ risks and whether the term “principal protected” is misleading and implies that the investment is guaranteed not to fall in value.

UBS had sold more than $1 billion of PPNs, described as safe investments backed by Lehman Brothers that were “guaranteed” against loss of principal. Au contraire, following Lehman Brothers’ bankruptcy filing on September 15, 2008, the PPNs are now in default causing the holders of these PPNs to become senior unsecured creditors in the Lehman bankruptcy proceeding. Practically speaking, these investors are left with virtually worthless investments.

PPNs have reemerged after losing much of their appeal during the time of the Lehman Brother collapse. The SEC’s delve into the sales and marketing practices of PPNs is a likely an attempt to ensure that investors are not lulled again with a false sense of security associated with these products.

Citigroup, Inc., which used the phrase “principal protected” in its May 2010 marketing materials, removed it from a brochure filed with the SEC on June 15th. Morgan Stanley, Bank of America and Barclays are among other firms that describe some structured notes in offering documents filed with the SEC as “principal protected.”

In December 2009, the Financial Industry Regulatory Authority issued a notice to member firms reminding the firms of their sales practice obligations in marketing and selling PPNs to investors. The 2009 Notice reiterates the requirements of member firms to provide “fair and balanced” materials to the public relating to the risks and returns associated with PPNs, to determine the suitability of such notes for an investor and to train registered persons in making recommendations of the notes to appropriate investors.

The securities law firm Blum Law Group is representing investors in FINRA arbitration claims who suffered losses in principal protected notes that were misrepresented by their broker and/or brokerage firm. Please contact us for more information.

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