What are Principal Protected Notes? (En Español | Em Português)

Principal protected notes typically combine a zero-coupon bond with an option or other derivative product whose payoff is linked to an underlying asset, such as an equities index or basket of indices. These investment products purportedly allow investors to participate safely in the gains of an index, a basket of indices, or a derivative while guaranteeing the return of at least a portion of the investors’ principal at the maturity of the note. PPNs sold to retail investors often have reassuring names that include some variant of “principal protection,” “capital guarantee,” “absolute return,” “minimum return” or similar terms. But they are not without risk, and often do not provide the level of safety that investors are lead to believe. Financial advisors who sold principal protected notes often failed to disclose the key terms and conditions of the PPNs to clients, including the true risks of these investments.

In most cases, the principal guarantee only applies to notes that are held to maturity. In short, notwithstanding the various optimistic titles given to these complex products, many principal protected notes do not provide absolute protection to principal. Many investors have lost all of their money that they invested in these products after they had been assured that the investments provided a “guaranteed” return of principal.

Structured products like principal protected notes often are sold, and not bought. In other words, few investors contact brokerage firms and expressly request PPNs. Part of the reason for this is that structured products often have very large markups and commissions relative to other fixed-income products. The markups or commissions on structured products can be two to five times that of more conservative bonds. As a result, many brokers sold the investments not because they were in the best interest of the client but rather because the investments provided the highest compensation.

Contact a lawyer who has experience with principal protected notes at the Los Angeles, New York City, Miami or West Palm Beach law office of Dimond Kaplan & Rothstein, P.A. for a free initial consultation.  Call today at 888-578-6255.