U.S. securities regulators are highlighting the risks associated with structured notes.
The U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy published a bulletin Monday that examines retail structured products, such as principal-protected notes and similar products.
“While structured notes may enable individual retail investors to participate in investment strategies that are not typically offered to them, these products can be very complex and have significant investment risks,” it says.
The bulletin highlights the importance of understanding the underlying reference assets or indexes, and the payoff structure, that drive the returns in structured notes. “Structured notes may have complicated payoff structures that can make it difficult for you to accurately assess their value, risk and potential for growth through the term of the structured note,” it says.
It also spells out a variety of additional risks, including liquidity risk, market risk, credit risk and call risk that can accompany structured product investments. And, it points out that the tax treatment of structured notes is complicated and, in some cases, uncertain.