FINRA Fines Ferris, Baker Watts $500,000 for Inadequate Supervision of Sales of Reverse Convertible Notes (Revcons)

The Financial Industry Regulatory Authority (FINRA) fined Ferris, Baker Watts LLC $500,000 for inadequate supervision of the sales of reverse convertible notes to their retail customers. Additionally, they were charged with unsuitable sales of the same instruments to elderly investors over 85 years of age. In the same FINRA action, the firm was ordered to pay $190,000 in restitution to the elderly investors involved.

FINRA elaborated by stating that “reverse convertible notes are complex investments that often entail significant risk of loss and also involve terms, features and risks that can be difficult for retail investors to evaluate.” They went on to say that Ferris, Baker’s supervisory procedures were inadequate, especially for protecting elderly investors.

Huge financial incentives made it attractive for financial advisors to peddle these products. The investments were often pitched as conservative, fixed income investments appropriate for elderly or conservative clients. However, once the underlying equity that makes up the note hits a certain price target, the conservative note converts into the underlying equity, resulting in massive losses for the investor. Morgan Stanley was a major player in this area, as well as others who were pushing similar products.

If you have suffered losses from investing in reverse convertible notes, please contact our securities law firm for a free, confidential consultation at 1-800-259-9010.

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