SEC Report Reveals B-Ds Wrongfully Steered Investors Into Complex Structured Products

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. During the investigation of eleven broker-dealers, the SEC discovered that firms might have steered investors into these complex products even though they were not suitable for their portfolios.

Other findings were broker-dealers charging prices that were too high, they didn't adequately disclose the risks related to the investments and they misrepresented them on investors' monthly statements. Accordingly, the SEC made the recommendation to broker-dealers that they need to improve their disclosures about structured securities products, establish procedures and controls to prevent abuses in the secondary market and conduct specialized training for their representatives who sell the instruments.

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, rising from $34 billion in 2009 to $45 billion in 2010. These products 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 the broker-dealer sold reverse convertible notes to investors whose investment objectives and tolerance for risk did not fit the product, making it an unsuitable recommendation. Firms were also found to be inadequately disclosing the material risks associated with investing in the reverse convertibles. As a result, there were many investors that suffered considerable losses in the securities when the value of the underlying equity securities dropped.

Because of the findings in this sweep, the SEC indicates that it is going to continue to monitor the situation and will be considering making further suggestions going forward to bolster investor protection.

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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