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February 17, 2010

FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN)

The Financial Industry Regulatory Authority (FINRA) has fined H&R Block Financial Advisors (now Ameriprise Advisor Services) $200,000 for failing to put in place the proper system to supervise its reverse convertible notes (RCN) sales to retail clients. FINRA also suspended H & R broker Andrew MacGill for 15 days while ordering him to pay a $10,000 fine and $2,023 in disgorgement for making unsuitable RNC sales to a retired couple. MacGill recommended that they invest close to 40% of their total liquid net worth in RCNs. Meantime, H & R Block has been ordered to pay the couple $75,000 in restitution for their financial losses. Without denying or admitting to the charges, the brokerage firm and MacGill consented to the finding’s entry.

According to FINRA, between January 2004 and December 2007, H&R Block sold RCNs without a system of procedures in place to properly monitor whether possible over-concentrations in RCNs were taking place in customer accounts. FINRA says that the brokerage firm relied on an automated surveillance system to monitor client accounts and review securities transactions for unsuitability but that the system was not set up to monitor RCN placement in customer accounts or RCN transactions. This caused H & R Block to miss signs of when there were potentially unsuitable levels of RCN in client accounts. Furthermore, FINRA says that the firm failed to provide guidance to its supervisors regarding the assessment of suitability standards related to their agents' recommendation of RCNs to the firm’s clients.

This is FINRA’s first enforcement action over RCN sales.

Reverse Convertible Notes
Reverse convertible notes offer a high coupon in return for the risk of getting shares valued at under the initial principal. Richard Ketchum, FINRA chief executive and chairman, has noted that it is not recommended for a client to place a significant chunk of one’s life savings into these kind of high risk, complex investments.

FINRA has issued Notice to Members 10-09 cautioning the entire brokerage community about their sales practice obligations to the investing public when it comes to RCNs and other risky “Complex Investment Vehicles.”

If you think you might have sustained investment losses because of unsuitable reverse convertible notes, contact our securities fraud law firm immediately.

Related Web Resources:
Regulator fines H&R Block $200K for poor controls, MarketWatch, February 16, 2010

Regulatory Notice 10-09, FINRA

FINRA Fines H&R Block Financial Advisors $200,000 for Inadequate Supervision of Reverse Convertible Notes Sales, FINRA/Business Wire, February 16, 2010

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Posted In: Ameriprise - Securities America , FINRA , Financial Firms , H&R Block , Reverse Convertibles

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June 12, 2009

Brokers Renew Push for Investors to Buy Structured Products

Brokers are once again getting behind structured products, hoping that investors will bite. While sales of structured products during 2008’s 4th quarter—at $5.8 billion—was down 75% from the year’s 1st quarter, sales are starting to go up. One reason for this is that certain structured products, such as return-enhanced notes and principal protected notes, are considered safer than reverse convertibles, which led to some of the worst losses for investor.

Ideally, structured products are supposed to provide sturdy profits, while limiting losses, and brokers like them because the commissions are high. However, representatives must still account for why these products haven’t delivered the way investors were told they would. Many investors that bought structured products from Lehman Brothers, such as the Lehman principal-protected notes, incurred some large losses. Some of these notes were bought through a UBS Financial Services office in Houston, Texas.

Until the bear market struck, structured products did incredibly well, and sales almost doubled to $105 billion in 2007 before dropping to $70 billion last year when structured products, collateralized debt loans, and credit default swaps played a huge role in the global financial collapse.

Reverse convertibles are considered the most high-risk structured product—short-term bonds with a large interest that can seriously hurt investors if the underlying stock drops dramatically. Investors can end up with shares with a value far below the principal. For example, 78-year-old Dominic Annino says he invested $300,000 in IndyMac shares and JetBlue shares and lost money after the stocks fell. He filed an arbitration complaint with FINRA and claims that the broker that sold him the Wells Fargo reverse convertibles never fully explained to him what he was getting himself into. Still, brokers are hoping that last year’s stock market fiasco won’t discourage investors from trying structured products again.

Twice Shy On Structured Products? Wall Street Journal Online, May 28, 2009

Understanding Structured Products, Investopedia

Continue reading "Brokers Renew Push for Investors to Buy Structured Products" »

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Posted In: Financial Firms , Lehman Brothers , Reverse Convertibles , Structured Products , UBS , Wells Fargo

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April 2, 2009

“Reversible Convertible” Risks are Now a Reality for Investors Dealing with Substantial Losses

A year ago, a Wall Street Journal article warned about the risk of investing in “reversible convertibles.” Now, these risks have become a reality for many investors, who have experienced substantial losses due to these products.

It began with Wall Street tempting investors who were hungry to make money with these risky complex securities while boasting of their potentially extravagant yields. These securities, which are usually linked to a single stock’s performance, can result in yields of 7% to 25% or greater.

In the past couple of years, sales of these notes soared, while yields for numerous fixed-income investments dropped. For example, in 2007, Arete Consulting LLC reported that small US investors purchased about $8.5 billion in reverse convertibles—an 81% increase from the year prior.

Morgan Stanley, ABM AMro Holding NV, and Barclays PLC are among the firms that have issued reverse convertibles, while firms including Wells Fargo and others were also active in the sales of these securities. These products are supposed to offer small investors a high level of income in return for a minimal investment. However, if the stocks drop dramatically, investors can lose most of their investment—especially if they didn’t take part in any of the underlying stock’s gains.

Reverse Convertibles
A reverse convertible is usually sold in notes of $1,000 increments that provide regular interest payments during the investment term. Upon the maturity of the note, an investor will receive their full original investment back in cash—except when certain conditions tied to a set “barrier” level apply.

However, if the underlying stock price drops under that level during the note’s term and finishes under the initial stock price, the investor doesn’t get cash and instead receives beaten down stock shares. This can be very dangerous for investors when reverse convertibles are linked to stock shares.

Reverse convertible buyers, who are selling a “put” option on the underlying stock, are obligated to purchase the shares if they go below a certain amount. The more high risk the stock, the greater the put option, and the higher the yield that investors can get paid.

Reverse convertibles also come with other challenges. An investor who tries selling a reverse convertible before it matures may have problems recovering his or her original investment.

In 2007, the Financial Industry Regulatory Authority sent inquiries to structured providers about their sales and marketing practices. Regulators wanted issuers to better monitor how they market reverse convertibles to small investors.

Issuers stand to gain financially from selling this product, which usually come with substantial fees (generally in the 2% or 3% range) and are priced into the yield that investors are getting. The issuer’s profit will depend on how it hedges against the risk of issuing the note.

Brokerage firms have been known to compare reverse convertibles to investments that are typically safer. FISN INC. lists reverse convertibles on its Web site under “CD Alternatives”—even though CD’s come with a lot less risk. The NASD, in 2005, recommended limiting the sale of structured products to investors who have options trading approval. Yet even sophisticated investors can run into problems with reverse convertibles.

With the markets becoming more volatile, the March 2008 WSJ article warned that circumstances could get “rougher”. Yet at that time last year, issuers were still claiming that even with the risks, reverse convertibles were still a good bet for investors.

Reverse convertibles have left investors with beaten-down shares. For example, investors who purchased reverse convertibles linked to Countrywide Financial Corp. (whose share prices sank over 70%) lost over 50% of their money by the time the notes matured.

Related Web Resources:
Risky Strategy Lures Investors Seeking Yield, The Wall Street Journal, March 28, 2008

Reverse Convertibles Can Turn The Tide On Investor Returns, Investopedia

Continue reading "“Reversible Convertible” Risks are Now a Reality for Investors Dealing with Substantial Losses" »

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Posted In: Reverse Convertibles

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