Magazine article American Banker

Complex Structured Notes a Lurking Liability

Magazine article American Banker

Complex Structured Notes a Lurking Liability

Article excerpt

Byline: By Edward Siedle

In my work forensically examining investment portfolios on behalf of endowments, foundations and pensions, I have observed an alarming trend.

Increasingly, banks serving in a fiduciary capacity, such as a discretionary or nondiscretionary trustee of a fund, are buying highly complex structured notes on behalf of clients or recommending they purchase such instruments.

This is disturbing because the notes lack virtually any of the hallmarks of a prudent investment, including such critical features as liquidity and transparency. While investing in any kind of structured note is almost never a good idea, these particular investments are by design especially unsuitable for fiduciary accounts.

To make matters worse, the structured notes I have found in bank fiduciary accounts are almost always issued or underwritten by the bank managing and acting as custodian for the portfolio. In one client's portfolio holding 61 structured notes, the bank served as placement agent for all 61 of them.

If the complexity and risk related to structured notes weren't daunting enough, I would think banks would consider conflicts of interest and self-dealing sufficient reason to avoid recommending them to fiduciary accounts. I can only conclude that the profits derived from selling these products are compelling. Apparently that's more temptation than many banks can resist.

Structured notes are highly customized investments created by savvy commercial and investment banks. The provisions of the notes are drafted to favor the firms and intermediaries that create and sell them and are of Byzantine complexity. …

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