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FINRA Takes Aim at Brokers Selling Reverse Convertible Notes

The Doss Firm

Investment News reports that Richard Ketcham, FINRA’s chairman and chief executive last week warned an audience of more than 900 industry professionals at the regulator’s annual meeting in Washington that the regulator is focusing on broker-dealers that sell structured products such a reverse convertible notes.

This news comes on the heels of our blog post last week that the Massachusetts’ state regulators is also targeting firms who are selling these products to retail investors. As we reported, structured products like reverse convertible notes are very complex investments that are rarely suitable for the average investor.

In this low interest environment, however, reverse convertibles are attractive to retirees seeking income because they provide above-average yields and resemble corporate bonds given that they are often linked to well known companies (e.g. AT&T, Verizon, Apple, etc.) What investors often do not know is that reverse convertibles involve complex and risky options trades which is often not adequately disclosed during the sales process. In general, when the stock price falls below a pre-determined price during the term of the note, upon maturity, investors receive shares of stock at a depressed price instead of their principal investment. To make matters worse, the products pay above-average commissions to a sales force who by in large are only knowledgeable about the sales points, not the intricate risks.

According to the article, more than 8,000 different structured products are currently offered and last year’s sales hit a record of $55 billion, up 61% from $34 billion in 2009. This shocking sales data and the historically volatile stock market spell danger and losses for investors. Regulators do need to be watching carefully this developing story.

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