Preferred securities combine features of both stocks and bonds, offering investors fixed dividend payments and priority claims over common shareholders. While these hybrid investments can provide steady income, they also carry risks that brokers sometimes fail to disclose, leading to significant investor losses.
If your broker recommended preferred securities without properly explaining the risks, or if you suspect fraud or misconduct, you may be entitled to recover your losses through Financial Industry Regulatory Authority (FINRA) arbitration. A preferred securities fraud lawyer can help you understand your rights and pursue the recovery supported by the facts.
Key Takeaways
- Preferred securities are hybrid investments with fixed dividends and priority over common stock, but they carry interest rate, credit, and call risks that brokers must disclose
- Common fraud schemes include unsuitable recommendations, misrepresentation of risks, and failure to disclose conflicts of interest
- Recovery options include FINRA arbitration, with cases typically resolving in 12-18 months
- Time limits apply: FINRA Rule 12206 is a six-year arbitration eligibility rule measured from the occurrence or event giving rise to the claim; federal securities-fraud claims generally use a two-year discovery period and a five-year repose period
- Evidence matters: account statements, offering materials, risk disclosures, and broker communications help determine whether the recommendation was suitable
What Are Preferred Securities?
Preferred securities are a type of hybrid investment that shares characteristics of both stocks and bonds. According to the Securities and Exchange Commission’s (SEC) investor bulletin, traditional preferred securities are fixed-income investments with equity-like features, primarily issued by large banks and insurance companies.
FINRA investor alerts explain that preferred securities typically pay fixed dividends and give shareholders priority in receiving payments if a company faces financial difficulties. However, they also carry unique risks that distinguish them from traditional bonds.
Key Characteristics of Preferred Securities
Stock-Like Features
- Traded on stock exchanges
- Price fluctuates with market conditions
- Dividends may be suspended without default
- No maturity date (perpetual)
- Subordinate to bondholders in bankruptcy
Bond-Like Features
- Fixed dividend payments
- Priority over common shareholders
- Less volatile than common stock
- Par value typically $25 or $1,000
- Callable by issuer
Types of Preferred Securities
| Type | Key Feature | Risk Consideration |
|---|---|---|
| Cumulative Preferred | Missed dividends accumulate and must be paid before common dividends | Accumulated dividends may take years to receive during financial distress |
| Non-Cumulative Preferred | Missed dividends are forfeited permanently | No recourse if company suspends dividend payments |
| Convertible Preferred | Can be converted to common stock at specified ratio | Conversion may not be advantageous if common stock declines |
| Callable Preferred | Issuer can redeem shares at predetermined price | Call risk limits upside potential when interest rates fall |
Risks of Preferred Securities Investments
Preferred securities combine risks from both the stock and bond markets. Understanding these risks is essential because brokers who fail to adequately disclose them may be liable for misrepresentation or unsuitable recommendations.
Important: The preferred securities market faces significant concentration risk due to heavy exposure to the financial sector. Following the 2008 financial crisis, banks issued large amounts of preferred securities to meet regulatory capital requirements, making the market particularly vulnerable to banking sector downturns.
Interest Rate Risk
SEC guidance notes that preferred securities are highly sensitive to interest rate changes. When rates rise, the fixed dividend becomes less attractive compared to new issuances, causing prices to decline. Many preferred securities have long maturities of 30 years or longer, or no maturity at all (perpetual), amplifying this risk.
Investors who must sell preferred securities after interest rates rise may experience significant capital losses, even if the issuing company remains financially stable.
Call Risk
Callable preferred securities can give issuers the option to redeem shares at a predetermined price after a stated call date. When interest rates fall, issuers often call existing securities and reissue them at lower rates. This creates asymmetric risk for investors: they face downside when rates rise but limited upside when rates fall because the issuer can call the securities.
Credit and Default Risk
If the issuing company faces financial difficulties, preferred shareholders may not receive expected dividends. According to SEC investor education materials, in bankruptcy, preferred shareholders rank below all corporate debt holders, meaning they may receive little or nothing after creditors are paid.
Liquidity Risk
Preferred securities generally trade with lower volume than common stocks, making them harder to sell quickly at desired prices. According to Investor.gov, this liquidity risk is especially significant during market stress when many investors attempt to exit positions simultaneously.
Common Preferred Securities Fraud Schemes
When brokers or financial advisors recommend preferred securities without proper due diligence or disclosure, investors may have grounds for a fraud or misconduct claim. The following schemes represent the most common violations we encounter.
Unsuitable Recommendations
Under FINRA Rule 2111, covered recommendations may require reasonable-basis suitability, customer-specific suitability, and quantitative suitability analysis.
Preferred securities may be unsuitable for:
- Retirees seeking stable income: Dividend suspension during financial stress can create income gaps many retirees cannot absorb
- Conservative investors: Price volatility tied to interest rates contradicts low-risk objectives
- Investors needing liquidity: Lower trading volumes make these securities difficult to sell quickly
- Short-term investors: Long duration and call features make preferred securities inappropriate for short time horizons
Misrepresentation and Omission
Material omissions or misleading statements about preferred securities may violate FINRA Rule 2020 when they amount to manipulative, deceptive, or fraudulent conduct. Common misrepresentations include:
- Describing preferred securities as safe or conservative investments
- Overstating dividend reliability or guarantees
- Failing to explain interest rate sensitivity and price volatility
- Omitting information about the issuer’s financial condition
- Not disclosing call provisions that limit upside potential
- Concealing the subordinated position in bankruptcy
Failure to Supervise
Brokerage firms must establish and maintain supervisory systems to prevent broker misconduct. When firms fail to properly oversee their brokers’ recommendations of preferred securities, they may be liable for resulting investor losses under failure to supervise claims.
Breach of Fiduciary Duty
Broker-dealer duties depend on the relationship, account, and recommendation. Recommending preferred securities primarily because they generate compensation, rather than because they fit the investor’s profile, may support claims under Regulation Best Interest’s Care Obligation, 17 C.F.R. § 240.15l-1(a)(2)(ii), FINRA Rule 2111, fiduciary-duty theories, or other applicable law.
Regulation Best Interest: Since June 2020, broker-dealers must comply with Regulation Best Interest when recommending securities to retail customers. The Care Obligation, 17 C.F.R. § 240.15l-1(a)(2)(ii), requires reasonable diligence, care, and skill when evaluating the customer’s best interest, and the rule also requires disclosure of material conflicts of interest.
Signs You May Be a Victim of Preferred Securities Fraud
Recognizing the warning signs of broker misconduct is the first step toward recovery. Contact an investment fraud lawyer if you experienced any of the following:
Before Investing
- Broker promised guaranteed returns or safe dividends
- Risks were minimized or not discussed
- You were not asked about your investment goals or risk tolerance
- High-pressure sales tactics were used
During Investment
- Account statements show unexpected losses
- Dividend payments stopped without explanation
- Broker is unresponsive to questions or concerns
- Excessive trading in your account
After Losses
- Broker blames market conditions for all losses
- Firm discourages you from filing complaints
- You discover information that was never disclosed
- Other investors report similar experiences
How to Recover Losses from Preferred Securities Fraud
Investors who suffered losses due to broker misconduct involving preferred securities have several paths to recovery. The most common is FINRA arbitration, which provides a faster and less expensive alternative to court litigation.
FINRA Arbitration Process
Most disputes between investors and brokerage firms are resolved through FINRA arbitration. According to FINRA’s 2024 statistics, the process typically takes 12-18 months from filing to resolution.
The arbitration process involves the following steps:
- Statement of Claim: Your attorney files a detailed document describing the fraud, parties involved, and damages sought
- Answer: The brokerage firm has 45 days to respond to your claim
- Arbitrator Selection: Both parties help select a panel of three arbitrators for claims over $100,000, unless the parties agree in writing to one arbitrator
- Discovery: Exchange of documents and information relevant to the case
- Hearing: Presentation of evidence and testimony before the arbitration panel
- Award: The arbitrators issue a binding decision
What You Can Recover
Through FINRA arbitration, investors may recover:
- Compensatory damages: The actual financial losses you suffered
- Interest: Pre-judgment and post-judgment interest on your losses
- Attorney fees: In some cases, the panel may award fees and costs
- Punitive damages: Additional damages for egregious misconduct (in limited circumstances)
| Resolution Method | Timeline | Key Features |
|---|---|---|
| Simplified Arbitration | About 7 months | For claims $50,000 or less; paper-based decision |
| Standard Arbitration | 12-18 months | Full hearing with arbitration panel |
| Mediation | Varies | Voluntary process; settlement depends on the facts and parties |
Time Limits for Filing Claims
Acting quickly is essential because multiple deadlines may apply to your preferred securities fraud claim.
Do not delay: FINRA Rule 12206 is a six-year arbitration eligibility rule, while state and federal statutes of limitations are separate and often shorter. California fraud claims generally use Cal. Civ. Proc. Code § 338(d)’s three-year discovery rule. Missing these deadlines can permanently bar your recovery.
Applicable Time Limits
- FINRA Eligibility Rule: Under FINRA Rule 12206, no claim is eligible for arbitration when six years have elapsed from the occurrence or event giving rise to the claim
- Federal Securities Claims: Federal § 10(b), 15 U.S.C. § 78j(b), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5, generally use a 2-year discovery and 5-year repose framework
- California State Claims: Fraud and misrepresentation claims generally use a three-year fraud limitations period with a discovery rule under Cal. Civ. Proc. Code § 338(d)
Why Choose Our Firm for Your Preferred Securities Claim
Gary Varnavides brings a unique perspective to preferred securities fraud cases. Having spent 10 years at Sichenzia Ross Ference LLP defending broker-dealers against investor claims, Gary now uses that insider knowledge to help investors recover their losses.
Insider Advantage
Gary knows how brokerage firms build their defenses because he used to build them. This experience helps identify weaknesses in the opposition’s case and develop effective strategies for recovery.
Recognized Excellence
Named a Super Lawyers Rising Star from 2015-2023, placing Gary among the top 2.5% of attorneys in the New York Metro area. Licensed to practice in California and New York.
Frequently Asked Questions
What are preferred securities and why are they risky?
Preferred securities are hybrid investments that combine features of stocks and bonds. They offer fixed dividend payments and priority over common shareholders but carry significant risks including interest rate sensitivity, call risk, credit risk, and liquidity concerns. Unlike bonds, preferred security dividends can be suspended without triggering default, potentially leaving investors without expected income during financial stress.
What constitutes fraud or misconduct involving preferred securities?
Fraud or misconduct includes recommending unsuitable preferred securities for your investment profile, misrepresenting or omitting material risks, failing to disclose conflicts of interest, and excessive trading (churning). Brokers who present preferred securities as safe or guaranteed investments, or who fail to explain their complex features and risks, may be liable for your losses.
How do I know if my broker’s recommendation was unsuitable?
A recommendation may be unsuitable if the broker did not analyze the product and the customer’s profile, including risk tolerance, investment objectives, time horizon, liquidity needs, and concentration. For example, recommending volatile, long-duration preferred securities to a retiree who needs stable income and liquidity may create suitability and best-interest concerns.
What is the difference between FINRA arbitration and going to court?
FINRA arbitration is typically faster (12-18 months versus years for litigation), less expensive, and more streamlined than court proceedings. Most brokerage account agreements require disputes to be resolved through arbitration rather than court. The process involves presenting your case to a panel of arbitrators who issue a binding decision. While you generally cannot appeal an arbitration award, the process provides an efficient path to recovery.
How long do I have to file a claim for preferred securities fraud?
Multiple time limits apply. FINRA Rule 12206 generally makes customer claims ineligible for arbitration when six years have elapsed from the occurrence or event giving rise to the claim. Federal securities fraud and California claims use separate limitation periods, so timing should be evaluated promptly.
What damages can I recover in a preferred securities fraud case?
You may recover compensatory damages equal to your actual financial losses, plus interest. In some cases, arbitration panels may award attorney fees, costs, or punitive damages when authorized by contract, statute, or governing law. The specific damages depend on the nature and extent of the misconduct and your resulting losses.
What evidence do I need to prove preferred securities fraud?
Important evidence includes account statements, trade confirmations, prospectuses or offering documents, communications with your broker (emails, notes from calls), your new account form showing investment objectives and risk tolerance, and any marketing materials provided. An experienced attorney can help gather additional evidence through the discovery process, including internal firm communications and the broker’s disciplinary history.
Can I recover losses if I signed documents acknowledging the risks?
Yes, in many cases. Signing disclosure documents does not necessarily prevent recovery if your broker verbally misrepresented the risks or failed to ensure you understood the documents. Brokerage firms cannot use boilerplate disclosures to escape liability when their brokers actively mislead investors or make unsuitable recommendations.
Take Action to Protect Your Investments
If you suffered losses in preferred securities due to broker misconduct, time limits apply to your claim. Do not wait to explore your recovery options.
Free Consultation
Contact Varnavides Law, PC for a confidential case evaluation. We will review your situation, explain your options, and discuss whether you may be entitled to recover your investment losses.