Autocallable Structured Notes

If the note is never called, it can end with the investor getting back much less than they put in, and many of these notes pay interest only while the stock or index stays above a set level. Some are tied to several stocks at once, where the weakest one decides the outcome. Losing money in an autocallable note is not, by itself, a claim. The key questions are whether the note fit the investor and whether the professional who recommended it fulfilled their duties.

This May Not Be Your Fault

If you did not fully understand how your autocallable note worked, you are far from alone. Notes with automatic call dates, interest levels, and protection levels are hard to follow even for experienced investors.

That is why the professional who recommended one had a duty to understand it first, explain it in terms you could follow, and recommend it only if it fit you. Under Regulation Best Interest (Reg BI), a rule of the Securities and Exchange Commission (SEC), a broker must understand a recommendation’s risks, rewards, and costs, and have a reasonable basis to believe it is in the investor’s best interest. The Financial Industry Regulatory Authority (FINRA), which oversees brokers, has also told firms that complex products such as structured notes call for heightened supervision. When that does not happen, responsibility may belong with the broker and the firm.

How Autocallable Notes Work

An autocallable note is a type of structured note linked to one or more stocks or indexes. On scheduled check dates, the note tests where those assets stand. What happens next depends on levels written into the note’s terms. Terms differ from note to note, but most combine these features:

• The autocall level. If the asset is at or above this level on a check date, the note is called and ends early. FINRA calls this an automatic call. The investor is paid back their original amount plus any interest or call premium due, and nothing after that. A multi-year note can end far sooner.
• The interest barrier. On many notes, interest is paid for a period only if the asset is above this level on the check date. Below it, that payment can be skipped. The SEC’s investor bulletin on structured notes warns that investors could lose coupon (interest) payments.
• The downside barrier. The SEC says this level may be called a barrier, trigger, or knock-in. If the note is never called and the asset ends below it, FINRA explains that principal becomes fully at risk. In offering documents for these notes, repayment typically falls point for point with the asset’s decline, so the loss can reach the entire investment.
• Worst-of baskets. When a note is tied to more than one asset, the weakest one decides the outcome, and a gain in one stock does not make up for a drop in another.

Offering documents for these notes also typically cap what the investor can earn at the interest or call premium, while losses are not capped, and they warn that after a call the investor must reinvest with no assurance of a comparable return. Costs, limited resale, and the issuer’s credit risk apply as they do to every structured note.

Example: a retiree who bought a note for steady income can see it called after a strong year, ending the payments, and then be moved into a new note with new costs, while another note held through a falling market pays nothing and ends below its barrier.

Common Examples of Autocallable Note Claims

• Notes described as steady income, or as comparable to a CD or bond, without explaining that interest can stop and principal can be lost — see Misrepresentation and Omission
• Principal-at-risk notes recommended to retirees or conservative investors — see Unsuitable Recommendations
• A large share of an account placed in autocallable notes, or in several notes tied to the same few stocks — see Overconcentration
• A firm that approved these notes for sale without catching a pattern of risky or concentrated recommendations — see Failure to Supervise
• Notes chosen for the compensation they paid the broker rather than for the investor’s needs — see Regulation Best Interest
• Called notes replaced again and again with new ones, generating fresh costs each time, which may support a churning claim
• Worst-of notes tied to volatile stocks, where the risk that one weak stock would decide the outcome was never explained

How Can You Protect Yourself From Autocallable Note Losses?

These notes are not off limits, but they call for more questions than a plain bond or fund does. A few steps that help:

• Ask for the three levels, in writing. Where do the autocall level, the interest barrier, and the downside barrier sit compared with the stock’s price today?
• Ask what happens if the market falls. Would interest stop, would it resume, and at what point would you start losing principal?
• Ask what happens if the note is called. Your money comes back, so ask where it would go next and what that new product would cost.
• Ask which stocks are in the basket. If there are several, any one of them falling past a barrier can decide the outcome.
• Read the pricing supplement. This document lays out the note’s terms. Ask how much of your account the note represents.

Signs Your Autocallable Note May Have Been Unsuitable

• You were told the note paid a high, steady income, but no one explained that payments could stop
• You did not know there were barrier levels, or what would happen if one was crossed
• It was described as an alternative to a CD, a bond, or other fixed income
• Your note was tied to several stocks, and one of them fell sharply
• Your interest payments stopped and have not resumed
• At maturity you received much less than you invested, or shares of a stock instead of your money back
• Each time a note was called, your broker quickly moved the money into another one
• Autocallable notes made up a large part of your account or your retirement savings
• No one walked you through the pricing supplement or term sheet