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FINRA Fines H&R Block Financial Advisors

FINRA Fines H&R Block Financial Advisors $200,000 for Inadequate Supervision of Reverse Convertible Notes Sales, Suspends and Fines Broker for Unsuitable Sales to Retired Couple

The Financial Industry Regulatory Authority (FINRA) issued a press release today announcing that it had

[fined] H&R Block Financial Advisors, Inc., (n/k/a Ameriprise Advisor Services, Inc.) $200,000 for failing to establish adequate supervisory systems and procedures for supervising sales of [reverse convertible notes] to retail customers. FINRA also fined and suspended H&R Block broker Andrew MacGill for making unsuitable sales of RCNs to a retired couple. The firm was ordered to pay $75,000 in restitution to the couple for losses they incurred."

FINRA has also published an Investor Alert on reverse convertibles.

Structured products are debt securities that often have unconventional and complex payoff structures. They are often linked to a security or index, such as the S&P 500 or the Russell 2000, and the security can be equity, commodities, currencies or debt. A reverse convertible note is an equity-linked structured product. It is a short-term note that pays a relatively high coupon rate compared to traditional notes. At maturity the returns of the note depends on whether the equity, called 'reference asset', falls below a pre-specified trigger price during the term of the note. If it does, then the note returns the market value of the number of shares of the reference asset which could have been purchased on the note's pricing date with the note's face value. If it does not, then the note returns its face value.

Investors of reverse convertibles have been overcharged by brokerage firms. The extent of the overcharge is so great that the expected return of reverse convertibles is negative. Since sales of RCNs have continued to grow, it is evident that investors are not aware of the costs of such a complex investment. SLCG has written a paper that values and analyzes a large sample of reverse convertible notes. Investors can use our dedicated website in which we offer explanations and pricing about a wide range of structured products.