On February 16, 2010, Financial Industry Regulatory Authority (FINRA) fined H&R Block Financial Advisors, Inc., (n/k/a Ameriprise Financial) $200,000 for failing to establish adequate supervisory systems and procedures for supervising sales of a unique and relatively new investment called reverse convertible notes to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill, a Tampa-based financial advisor, for making unsuitable sales of reverse convertible notes to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred.
The Doss Firm, LLC, a law firm that focuses on representing investors against financial firms like Ameriprise Financial, may have uncovered that the circumstances surrounding Andrew MacGill’s suspension and Ameriprises’s $200,000 fine is not an isolated incident. The problem is regional, if not firm-wide and involves Ameriprise’s financial advisors targeting senior citizens to purchase high-risk reverse convertible notes. These products are sold to investors as safe cash-alternative investments.
Today, the law firm filed suit on behalf of an elderly couple from Sun City Center, Florida (80 years old and 75 years old), who claim that they also were victimized by H&R Block Financial Advisors, Inc./Ameriprise Financial in connection with sale of reverse convertible notes. The elderly couple opened accounts at the firm after attending a free lunch seminar sponsored by H&R Block at an upscale restaurant in Apollo Beach, Florida.
In the press release announcing the fine and suspension, FINRA Chairman and CEO Richard Ketchum stated, “For the typical retail investor, for instance, it would be unwise to put anything more than a small portion of life savings into riskier structured products such as reverse convertible notes.” In the case filed today, at one point over 40% of the elderly couples retirement accounts were invested in reverse convertible notes.
What is a reverse convertible note?
A reverse convertible note (RCN) is a structured product that typically consists of a high-yield, short-term note of an issuer and effectively a put option that is linked to the performance of an unrelated, or “linked,” asset – usually a single common stock, but sometimes a basket of stocks, an index or some other asset. As a general rule, upon maturity of an RCN, the investor will receive either his full principal investment or a predetermined number of shares of the linked equity (which may be worth less than the principal investment), depending on the performance of the linked equity. Generally speaking, the higher the coupon rate, the higher the expected volatility of the linked equity and the greater the likelihood of the investment resulting in payment of shares. Reverse convertibles not only come with the risks that fixed income products ordinarily carry, such as issuer default and inflation risk, but with additional risks of the underlying asset, which can depreciate or even become worthless. The initial investment for most RCNs is $1,000 per unit and most RCNs have maturity dates ranging from three months to one year.
In the enforcement matter against Ameriprise, FINRA found that during the period from January 2004 through December 2007, H&R Block engaged in sales of RCNs without having a system or procedures in place to effectively monitor customer accounts for potential over-concentrations in RCNs. As a result, the firm failed to detect and respond to indications of potential over-concentration in RCNs in numerous customer accounts.
FINRA found that H&R Block utilized an automated surveillance system to facilitate its suitability review of securities transactions and to monitor customer accounts for potentially unsuitable positions and activity. The system would flag for review any transaction or account meeting certain parameters established by the firm relating to, for example, account turnover and concentration levels in a particular security or class of security. The firm’s system, however, was not configured or designed to monitor RCN transactions or RCN positions in customer accounts and the firm did not establish an effective alternative means to do so. As a result, H&R Block failed to detect and respond to indications of potentially unsuitable RCN concentration levels in numerous customer accounts. Additionally, the firm failed to provide sufficient guidance to its supervising managers on how to assess suitability in connection with their brokers’ recommendation of RCNs.