A number of brokerage firms have sold reverse exchangeable securities, also known as reverse convertibles, to retail investors. These structured products, promising high yields, are often difficult for the average investor to understand and are loaded with risks. In Regulatory Notice 10-09, the Financial Industry Regulatory Authority (FINRA) noted the complexity of these products, which are essentially a short-term note whose performance is tied to a separate asset such as a common stock or grouping of stocks, or an index. The maturity dates of these investments generally range from three months to a year and feature coupon rates oftentimes higher than conventional debt instruments.
As reverse convertibles are tied into the performance of an underlying asset and structured with its own terms and conditions, including “knock-in” and “barrier” pre-determined performance levels – making for a very uncertain, complex, and risky investment which many financial advisors don’t even understand. Another problem associated with them is liquidity – that is, the prospect of a no-liquid market which may result in the inability to sell the product at or near its original purchase price.
Most recently, FINRA ordered RBC Capital Markets to pay a $1,000,000 fine and approximately $434,000 in restitution to investors due to supervisory deficiencies which effectively permitted the unsuitable of these investments to unsuspecting customers.
We offer a free initial consultation to investors who feel they may have been victimized to the improper sale of Reverse Convertibles, also known as reverse exchangeable securities.