RBC Ordered to Pay $1.4 Million for Unsuitable Sales of Reverse Convertibles

Posted on May 13th, 2015 at 3:08 PM
RBC Ordered to Pay $1.4 Million for Unsuitable Sales of Reverse Convertibles

FINRA 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 convertible.

According to FINRA, 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. RBC did establish 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. But 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.

Reverse convertibles 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 Regulatory Notice 10-09 specific to reverse convertibles, emphasizing the need for firms to perform a suitability analysis in connection with sales of this complex product.

Related Attorneys: James J. Eccleston

Tags: Jim Eccleston, Eccleston Law, Eccleston Law LLC, rbc capital markets

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