According to the Securities and Exchange Commission, the sales practices that broker-dealers engage in when structured securities are hurting investors. The SEC released this recent finding in a report this week. Structured securities products are derivatives whose value is determined from baskets of indexes, other securities, options, debt issuances, commodities, and foreign securities.
The SEC reached its conclusion after conducting a sweep examination of 11 broker-dealers. The Commission says that the financial firms may have guided clients toward complex products even though they were unsuitable for these investors. In certain instances, they also appear to have:
• Charged too high of prices • Failed to adequately reveal all risks involved
• Traded at prices that were not to the benefit of retail investors • Committed possible supervisory deficiencies
At the heart of the SEC sweep examination were reverse convertible notes, which is a security that has an embedded put option. RCN are considered among the riskiest structured products. According to the SEC report, there were clients who purchased RCN’ even though these financial products not in line with their investor profiles or stated goals. Many of these RCN investors sustained significant financial losses.
The SEC report is recommending that broker-dealers:
• Implement procedures and controls to detect and stop structured securities-related abuses • Reveal material facts about the structured product notes when offering them to investors • Make sure that supervisors and registered representatives undergo specialized training before they sell structured securities
• Properly list structured securities products on client statements
It was just recently that the Financial Industry Regulatory Authority Inc. warned investors to exercise caution when evaluating whether to buy complex investment products.
Our securities fraud lawyers represent investors that have suffered financial losses because they were encouraged to purchase financial instruments that were inappropriate for them.
SEC blasts B-Ds over sales of reverse convertibles, Investment News, July 27, 2011
Staff Summary Report on Issues Identified in Examinations of Certain Structured Securities Products Sold to Retail Investors, SEC, July 27, 2011 (PDF)
More Blog Posts:
RBC Wealth Management Unit Ferris Baker Watts to Pay Investors Restitution Over Reverse Convertible Notes Allegations, Says FINRA, Stockbroker Fraud Blog, October 23, 2010
Increase of Structured Notes with Derivatives Sales Seduces Retirees, Reports Bloomberg, Stockbroker Fraud Blog, September 25, 2010
FINRA Fines H & R Block Financial Advisors (Now Ameriprise Advisor Services) over Sales of Reverse Convertible Notes (RCN), Stockbroker Fraud Blog, February 17, 2010 Continue Reading ›