The Financial Industry Regulatory Authority is ordering RBC Capital Market to pay restitution to customers for supervisory failures that allowed for the sale of reverse convertibles that were unsuitable for them. The firm must pay them about $434,000 plus a $1 million fine.
According to the self-regulatory organization, RBC lacked supervisory systems that were reasonably designed to identify transactions that warranted review when the reverse convertibles were sold to customers. This purported inadequacy is s a violation of FINRA’s rules and suitability guidelines.
Although RBC had guidelines for selling reverse convertibles, specific criteria were established regarding annual income, investment goals, liquid net worth, and investment experience. Because of this, the firm was unable to detect the sale of 364 reverse convertible transactions by 99 of its registered representatives. The transactions involved 218 accounts and they were not suitable for the account holders. The customers lost at least $1.1 million.
RBC had already paid a number of the customers to settle a related class action securities case. Now, FINRA wants the firm to pay the rest of the customers who were affected.
By settling this case, RBC is not denying or admitting the securities charges. It is, however, consenting to the entry of the SRO’s findings.
These interest-bearing notes have their repayment of principle tied to how well an underlying asset performs. Depending on the specific terms, an investor could be at risk of losing money if the underlying asset’s value drops under a certain level during the reverse convertible’s term or at maturity. In 2010, FINRA put out a notice specifically telling firms to make sure to conduct a suitability analysis when it comes to selling this type of complex product.
Earlier this month, SEC Commissioner Luis Aguilar said that the regulator is looking to bring more enforcement actions against companies that sell risky structure products and complex securities to retail investors. Examples of complex securities: leveraged and inverse exchange-traded funds, alternative mutual funds, and structured notes.
FINRA Orders RBC to Pay Fine and Restitution Totaling More Than $1.4 Million for Unsuitable Sales of Reverse Convertibles, FINRA, April 23, 2015
Read the FINRA letter of acceptance, waiver, and consent (PDF)
More Blog Posts:
FINRA and SEC Unveil Report on Senior Investors, Cite Concerns About Unsuitable Recommendations, Stockbroker Fraud Blog, April 27, 2015
RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010
FINRA Fines J.P. Turner, LaSalle St. Securities, and H. Beck For Report Supervision Lapses, Institutional Investor Securities Blog, March 30, 2015