Retirements at Risk from Widespread Abuse of High-Risk Derivatives, Finds New Study by Demos & The Nation Institute

Release Date: 
May 17, 2011

New York, NY – 'Shadow Market' investment products have come under scrutiny following the banking meltdown, but they continue to be aggressively marketed to clients who can least afford the potentially catastrophic losses. Millions of American seniors could see their golden years turn bleak if the poorly regulated derivatives underpinning their investment plans implode, according to "How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors' Retirement Security."

The report details how banks and brokers sold more than $52 billion of these "structured notes" — including at least $32 billion by the top banks alone — in 2010. Investors' complaints drove the number of arbitration cases to double in 2009 over the previous year according to the Financial Industry Regulatory Authority (FINRA), which has jurisdiction over these products.

“For far too long, brokers have been selling their older clients complex investments known as 'structured notes' that are so risky, and so costly in fees, that some of them are almost sure money losers,” said John F. Wasik, an award-winning investigative writer and columnist for Reuters, who authored the report which is co-published by Demos and The Investigative Fund at The Nation Institute. 

Key findings: 

  • Brokerage firms improperly target the income-oriented elderly with high-commission products and intense sales pressure.
  • These highly risky products are misleadingly labeled as "principal protected" or marketed as being "safe and secure."
  • Few brokers, let alone individual investors, understand fully the risks and costs associated with these opaque investments.
  • Regulators have only begun to pay attention to this toxic trend now that investors have lost billions.

While the SEC and a number of state securities agencies set up special task forces to police structured products last year, "How Safe Are Your Savings?" calls for essential reforms, including: 

  • Calling on the Securities and Exchange Commission to finalize a strong pro-investor rule to make brokers "fiduciaries," so they will be legally liable if they ignore clients’ investment objectives.
  • Demanding that Congress continue to generously fund the SEC and make its budget independent of politics.
  • Requiring full disclosure in plain language on page one of the prospectus of the full costs, expenses, and risks of the products being sold by banks to investors.

"These [structured] notes flunk the suitability and appropriateness test for retail investors," Janet Tavakoli, a consultant on structured finance who has written several books on these products, told Wasik. "They also flunk the test for most investment managers, investment advisors and pension fund managers. Retail investors may find that the managers who are supposed to protect their interests are in fact collecting fees and turning a blind eye to the risks."

Victims' attorneys and a regulator will be made available for comment on the report. To schedule an interview, or speak with the report's author, please call or email the contacts above. 

###