Collateralized Loan Obligations, also known as CLOs, are a popular new investment being sold retail investors despite their high risk. As reported in the Wall Street Journal on October 17, 2024, Wall Street is trying to sell ordinary investors “low-rated corporate loans” by packaging them as CLOs. Such sales are largely inappropriate unless the investor if fully aware of the risk, the investor had the means to financially withstand a high risk of loss, and the investor is looking to speculate.
BlackRock, Nuveen and other asset managers, have recently asked permission from the Securities and Exchange Commission (SEC) to launch new exchange-traded funds (ETFs) of collateralized loan obligations. CLOs are made by bundling bonds rated as junk. Those asset managers will join about $16 billion in assets of other CLO funds that have already entered the market.
These investments are especially vulnerable to economic downturn. CLOs contain loans to companies with weaker credit ratings. Like its cousins, the collateralized debt obligation (CDO), and collateralized mortgage obligations (CMO), those obligated to pay CLO investors are usually the first hit and first to fail during times of recession.
FINRA, the entity that oversees securities brokerages, strictly regulates CLOs and CDOs. FINRA Rule 2111 states that a securities broker can only recommend high risk investments to suitable investors. That means that an investor must understand the investment, the investment must be consistent with the objectives of the investor, the investor must be able to financially withstand the risk of such investment, and that the investor must be looking to incur such risk.
Brokers incentives are significant, and not necessarily legitimate, to recommend unsuitable CLOs. The investments generally pay a much higher commission than a traditional investment such as a stock or bond.
We have represented investors for over 20 years in claims concerning investment suitability. Call for a free consultation. Call toll-free at 844-253-5858.
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