SEC Investigation Discovers That Investors Were Steered Into Complex Products By B-Ds

The Securities and Exchange Commission (SEC) has released a report revealing huge problems with the marketing and sales practices of broker-dealers regarding complex structured products and especially reverse convertible notes, according to Investment News. The SEC investigation revealed that many investors had been sold these products in situations where they did not meet their investment objectives and tolerance for risk.

Other findings were that firms charged investors excessive prices; that investors were not properly warned about the risks involved with reverse convertibles; and the investments were improperly represented on monthly statements. Firms were asked to do a better job with their disclosures regarding reverse convertibles and to ramp up their training sessions on the products.

As investors chase the returns in a climate of historically low interest rates and a volatile marketplace, the sales of structured securities products has skyrocketed, increasing from $34 billion in 2009 to $45 billion in 2010. Reverse convertibles are even more risky than some of the other structured products because of its relationship to its inherent put option, according to the SEC.

Reverse convertibles are derivatives whose value is based on other securities, baskets of indexes, options, commodities, debt issuances and foreign securities. The SEC report concluded that one of the riskiest structured products is the reverse convertible note, which is a security with an embedded put option. This SEC report follows on the heels of a recent FINRA warning to investors about chasing returns and investing in complex structured products.

Some of the most disturbing findings were instances where firms sold reverse convertible notes to investors whose needs and tolerance for risk did not match the investment, much less appreciate the risks involved with reverse convertibles. As a result, some suffered massive losses when the value of the underlying stock went down.

According to the SEC, it will continue to be vigilant in monitoring the sales of these products going forward to make certain unwary investors are protected.

If you have suffered losses in complex structured products, especially reverse convertible notes, please contact our securities law firm for a confidential, no obligation consultation at 1-800-259-9010.

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