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As Interest Rates Rise Investors May Suffer Devastating Losses And File More Customer Related FINRA Arbitrations

In 2012, the Financial Industry Regulatory Authority (“FINRA”) experienced a lull in customer initiated arbitrations, which were down 16% from 2011. FINRA also experienced a 21% decline in customer related arbitrations during the first four months of 2013. Industry experts and securities lawyers believe that this decline in case filings will pick up as investors are looking toward investments that have a higher yield, and sometimes a higher risk than anticipated, including bond and income funds, alternative investments, variable annuities, private placements, Tenants In Common (“TIC”), non-traded Real Estate Investment Trusts (“REITs”), and other non-equities. It is anticipated that action taken by the Federal Reserve in the near future will cause interest rates to rise, and as a result the value of those high yielding investments will plummet. Industry experts and investment attorneys believe that the investor groups who will be devastated by the rise in interest rates will be the elderly and individuals on fixed incomes whose investments constituted their “nest eggs.” Although bond investors may be able to ride out the high interest rates and await maturity, investors in bond funds will not have that luxury as industry reports have highlighted recent declines in bond fund net inflows. For example, for the first quarter of 2013, it was reported that intermediate-term-bonds experienced a 71% drop in monthly net inflows. Industry experts have been warning bond fund investors of what to experience as interest rates rise. Specifically, FINRA Chief Executive Officer, Richard Ketchum, at the annual FINRA Conference in Washington D.C. on May 20 – 22, 2013, warned investors of the “sounding alarms about the possibility of plunging bond values as the economy recovers and interest rates rise.” It will be interesting to see whether the number of FINRA customer related cases rises as interest rates rise.

Lax & Neville has extensive experience in successfully prosecuting claims on behalf of customers who have suffered losses. Please contact our team of attorneys for a consultation at (212) 696-1999.

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