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.
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