Published on:

FINRA Fines H&R Block Financial Advisors n/k/a Ameriprise Financial and Andrew MacGill In Connection With Improper Sales of Reverse Convertible Notes

FINRA, Financial Industry Regulatory Authority announced that it was fining H&R Block Financial Advisors, Inc. (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory procedures in connection with the sale of reverse convertible notes. FINRA also fined Andrew MacGill, an advisor of the firm for making unsuitable recommendations to a retired couple.

FINRA also released an Investor Alert, Reverse Convertibles – Complex Investment Vehicles, to educate consumers about these complex structured products. FINRA also issued Regulatory Notice 10-09, reminding firms of their sales practice obligations when recommending or selling reverse convertible notes.

A reverse convertible note is a type of structured product. According to Notice To Members (“NTM”) 05-59, structured products are securities created by investment banks that are derived from or based on a single security, a basket of securities, an index, a debt issuance, and/or foreign currency. As such, these investments come in many shapes and sizes.

Most structured products pay an interest or coupon rate substantially above the prevailing market rate. Structured products also frequently cap or limit the upside participation in the referenced asset. These unique financial instruments are typically issued by investment banks or their affiliates and have a fixed maturity date. Some structured products are listed on a national securities exchange and some are not. Because they are so unique, however, even those listed on a national exchange are thinly traded.

As a result, once an investor purchases such an investment, it is difficult to get out of it prior to the maturity date without suffering a substantial penalty. Structured products typically have two components – a note and a derivative (often an option). The note pays interest to the individual at a specified rate and interval. The derivative component or option component establishes the payment upon maturity.

Most reverse convertibles sold to consumer are linked to a single stock in a household name company (e.g. Jet Blue, Norfolk Southern, Lowes and Bristol Myers to name a few.) Prior to the maturity date, which was typically only a few months, investors receive interest payments at a rate that is higher than the prevailing market rate. Importantly, the reverse convertible notes do not allow investors to participate in any upside in the referenced underlying stock. Investors fully participate, however, in all downside market risk of that stock, because upon maturity (i.e. at the expiration of the option), if the price per share of the underlying stock falls below a predetermined value, the note converts into shares of underlying common stock at the eroded price per share. In other words, in exchange for receiving some income, investors risk losing some or all of their principal investment by assuming all of the downside risk of the underlying stock and by giving up all of the upside potential.

These are inherently very risky investments. Unfortunately, in many instances they were sold as safe income-producing alternative investments, which is why FINRA has taken action.

If you were sold reverse convertible notes and lost money you may legal rights to recover your losses. Please call The Doss Firm, LLC for a free consultation.