1. Auction Rate Securities (A.R.S.)
Many firms marketed ARS as a safe and liquid alternative to a money market investment. The product was dependent upon an auction between firms which kept this long-term product liquid. The major participants in the auctions were aware of failed auctions before the meltdown in early 2008. Auction failures were an early warning sign about the liquidity of ARS.
In some cases, the ARS provides a default interest rate. Some provide no default rate and have significant market (loss) exposure.
An investigation into the specific product is important before making a decision to move forward. In some cases, due to actions of state regulators, large firms have committed to repurchasing ARS. Other, smaller firms, continue to refuse to repurchase or accept responsibility of misrepresenting the product.
2. Private Placements or Regulation D Offerings
A report of the Office of Inspector General notes abuses by issuers and sellers in Regulation D offerings.
"Accredited Investors" and non-accredited investors have potential remedies against an issuer or broker-dealer for unsuitability, negligence, misrepresentations, omissions or fraud in connection with a Reg. D offering. These products often have arbitration agreements written into the subscription agreement.
3. Structured Notes
These complex products were sold to small investors in a growing number in 2007 and 2008. Generally, these products are marketed to investors as a way to get exposure to stocks, commodities, currencies or indexes without actually owning these assets.
Brokerage firms make substantial fees issuing equity-linked notes. In addition, there are "spreads" available to underwriters when selling an initial offering. Marketing includes catchy names that are synonymous for the underlying product. Some products were titled "principal Protected" which purported to guarantee the return of principal. Some notes were linked to interest rates, currencies, commodities and stocks. Some notes carried names like reverse convertible notes. Many products were unsuitable for investors.
4. Short-term Products
In an effort to compete for short-term money, some portfolio managers sought increased return from structured finance holdings which contained significant exposure to the subprime markets.
For example, the Charles Schwab YieldPlus fund lost 31.7% from June 2007 - June 2008. The fund contained large amounts of securities backed by illiquid, uninsured private label mortgages (higher than competitors).
Leveraged Municipal Bond Arbitrage products were marketed by fixed income hedge funds (or marketed by formerly large broker-dealers) to municipal fixed income investors as little, if any, additional risk over typical municipal bonds.
5. Variable Annuities
These are long-term products. Typical sales pitches offers these as tax advantaged products. However, if the product is sold to a retirement account (401k or IRA), the tax component has no benefit. Many annuities are marketed as requiring a new policy after the surrender period has expired. This is likely unnecessary.
