If you have suffered losses at RBC in reverse convertible investments please call toll-free 1-866-817-0201. The Financial Industry Regulatory Authority (FINRA) today announced on April 23, 2015 that it has ordered RBC Capital Markets to pay a $1 million fine and approximately $434,000 in restitution to customers for supervisory failures resulting in sales of unsuitable reverse convertibles. While this fine may seem significant, investors should consult with a private attorney if they wish to maximize their recovery.
In the FINRA release, Brad Bennett, FINRA Chief of Enforcement, said, “Securities firms must ensure that their brokers understand the inherent risks associated with the complex products they are selling, and be able to determine if they are suitable for investors before recommending them to retail customers. When the firm establishes suitability guidelines, it must police the transactions to ensure they appropriately meet their own criteria.”
Reverse convertibles are extremely complex investments that are only suitable for a small section of the investing public, and, thus, could only legally be sold to certain sophisticated investors. They are interest-bearing notes in which repayment of principal is tied to the performance of an underlying asset, such as a stock or basket of stocks. Depending on the specific terms of the reverse convertible, an investor risks sustaining a loss if the value of the underlying asset falls below a certain level at maturity or during the term of the reverse convertible. In February 2010, FINRA issued a regulatory notice emphasizing the need for firms to perform a suitability analysis in connection with sales of this complex product.
FINRA found that RBC failed to have supervisory systems reasonably designed to identify transactions for supervisory review when reverse convertibles were sold to customers, in violation of FINRA’s rules as well as the firm’s own suitability guidelines. The sale of unsuitable securities is generally seen as a form of fraud since more complex or risky investments generally provide for a higher commission to the broker and brokers are limited to selling only suitable securities – securities that an investor understands and that are consistent with an investor’s tolerance for risk.
RBC established suitability guidelines for the sale of reverse convertibles setting specific criteria for customer investment objectives, annual income, net worth, liquid net worth and investment experience. Consequently, the firm failed to detect the sale by 99 of its registered representatives of 364 reverse convertible transactions in 218 accounts that were unsuitable for those customers. The customers incurred losses totaling at least $1.1 million. RBC made payments to numerous customers pursuant to the settlement of a class action lawsuit; FINRA ordered restitution to the remainder of affected customers.
FINRA’s investigation was conducted by the Enforcement Department. FINRA appreciates the assistance of the Securities and Exchange Commission’s Office of Compliance, Inspections and Examinations in this matter.
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