Structured Investment Products: How to Prove a Mis-Sale Claim

Structured investment products are securities under the Securities Act of 1933 and must be registered with the SEC unless an exemption applies, and the registration framework requires the issuer to file a prospectus that discloses the terms of the product, the identity and creditworthiness of the issuer, the nature of the underlying asset, and all material risks. A product that is not properly classified or registered exposes the issuer to SEC enforcement action and the distributor to rescission claims by investors.

Securities regulations and SEC compliance counsel can advise on the specific structured product legal classification and registration framework and develop the product classification and securities compliance strategy.

The return structure of a structured investment product must be disclosed in a manner that enables a retail investor to understand both the circumstances in which a positive return will be achieved and the circumstances in which the investor will receive less than the principal invested, and a prospectus that describes the potential upside without clearly explaining the barrier conditions and knock-in mechanisms that can result in full principal loss fails to meet the transparency standards required by FINRA Rule 2210.

Structured finance and investment fund regulation counsel can advise on the specific structured product type and develop the structured investment product legal framework strategy.

Capital markets and consumer financial protection bureau counsel can advise on the specific derivative component and return structure transparency issues and develop the product disclosure strategy.

FINRA Rule 2111 requires broker-dealers to have a reasonable basis to believe that a recommended structured investment product is suitable for the specific customer based on the customer's investment profile, including the customer's age, income, net worth, investment experience, investment objectives, risk tolerance, time horizon, and liquidity needs. A structured product with a complex barrier mechanism or significant principal-at-risk features is unsuitable for a customer with conservative investment objectives or limited financial sophistication.

SEC enforcement and investor rights counsel can advise on the specific FINRA suitability rule obligations and develop the investor risk profile assessment and suitability compliance strategy.

SEC regulations require that offering documents for structured investment products be written in plain English and include a summary term sheet that clearly explains the key features, the conditions under which the investor will receive less than the full principal, and all material risks. FINRA Rule 2210 requires that all communications about structured products be fair, balanced, and not misleading, and marketing materials that emphasize the potential upside without giving equal prominence to the conditions under which principal loss can occur violate the rule.

Securities litigation and financial fraud counsel can advise on the specific structured product disclosure obligations and develop the disclosure compliance and investor communication strategy.

Proving a mis-sale claim requires establishing that the product was unsuitable for the investor based on the investor's documented risk profile, that the broker-dealer lacked a reasonable basis for the recommendation under FINRA Rule 2111, and that the investor suffered a loss causally connected to the unsuitable recommendation. A material misrepresentation claim requires proving that a statement about the product's risk, return, or structure was false or misleading, and that the investor relied on the misrepresentation and suffered loss.

Securities fraud and investment fraud counsel can advise on the specific suitability failure and material misrepresentation elements and develop the mis-sale proof and litigation strategy.

A knock-in event occurs when the price of the underlying asset falls below the barrier level specified in the product terms, converting what appeared to be a conservative structured note into a product that tracks the full downside of the underlying asset without any principal protection, and investors who purchased barrier notes without understanding this mechanism have strong mis-sale claims when the knock-in occurs. The legal analysis requires examining the offering documents, the investor's financial sophistication, and whether the broker-dealer conducted the required suitability analysis.

Investment recovery and investment loss recovery counsel can advise on the specific knock-in event, principal loss, and investment recovery claim elements and develop the structured product loss recovery strategy.

The primary defense against a structured investment product mis-sale claim is that the product was suitable for the investor based on a properly documented suitability analysis conducted at the time of the recommendation, and a broker-dealer that maintained detailed records of the customer's investment profile, the suitability analysis performed, and the disclosures made is in the strongest position to defend against a post-loss claim. The argument that the investor's loss was caused by market conditions is a secondary defense.

Corporate fraud and complex litigation in high-stakes civil disputes counsel can advise on the specific suitability and disclosure defense elements and develop the structured product defense strategy.

Most structured investment product investor claims are resolved through FINRA arbitration rather than federal court litigation, because FINRA rules require broker-dealers to arbitrate investor disputes and FINRA arbitration provides a faster and less expensive forum. A class action in federal court is available when a large number of investors purchased the same structured product and suffered similar losses due to the same disclosure failure or suitability violation.

Securities fraud class action and class action litigation counsel can advise on the specific FINRA arbitration and securities litigation options and develop the structured product investor recovery strategy.