SEC Looks into the Marketing of "Principal-Protected" Notes

Numerous financial companies have been asked how they market “principal-protected” notes, which follows the collapse of Lehman Brothers Holdings Inc.
When Lehman Brothers went bankrupt in 2008, the principal-protected notes that the company had guaranteed significantly declined in value. As a result, investors reportedly lost at least $1.7 billion. These investors claim that they received “misleading” information and the phrase, “100 percent principal protection,” was used to market the notes.
The U.S. Securities and Exchange Commission’s (SEC) Division of Corporation Finance is now examining how these products are being marketed, including how the risks are described and whether the term “principal-protected” is misleading. One of the main concerns is that this term could imply that the investment is guaranteed not to decline in value. The division’s findings may be sent to the enforcement unit, which is charged with investigating fraud.
Citigroup Inc., was among the financial institutions that had used the term, but it removed it from a brochure that was filed with the SEC on June 15th. Barclays Plc, Morgan Stanley and Bank of America Corp. have also described structured notes as “principal-protected.”
According to Kenneth Lench, head of the SEC’s Structured and New Products enforcement unit, “you’ve got these long disclosure documents, but oftentimes there are marketing materials and those have to be accurate as well.”
Last year, the Financial Industry Regulatory Authority (FINRA), sent a notice to brokers telling them to ensure that marketing materials for these securities were “fair and balanced.”


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