FINRA Announces Enforcement Action Relating to Reverse Convertible Notes

The Financial Industry Regulatory Authority (FINRA) recently announced an enforcement action against H&R Block Financial Advisors relating to its sale of reverse convertible notes (RCNs). RCNs usually offer an attractive yield when compared to other stocks and bonds, in part because of their highly risky nature. FINRA charged H&R Block Financial with failing to establish adequate supervisory systems and procedures for overseeing the sales of RCNs to retail investors.

In addition to the enforcement action that fined H&R Block Financial with a $200,000, FINRA also fined and suspended H&R Bock Financial broker Andrew MacGill for making unsuitable sales of RCNs to a retired couple. The couple will receive $75,000 in restitution for their investment loss.

While fining H&R Block for a failure which may well have led to multiple other investors incurring investment losses, FINRA also issued an Investor Alert titled, “Reverse Convertibles – Complex Investment Vehicles.” The goal of this alert is to educate investors on the risk associated with RCNs. Also, FINRA issued Regulatory Notice 10-09 as a reminder to broker/dealers of their obligations to clients when recommending and selling RCNs to their clients.

As stated by FINA Chairman and CEO Richard Ketchum, “Firms selling reverse convertibles [RCNs] or similar products must ensure that their brokers understand the risks and costs associated with these products and perform adequate suitability analyses before recommending them to any customer. Fimrs must also have procedures in place to monitor customer accounts for potentially unsuitable concentration levels of these products.”

The enforcement action announced today by FINRA provides hope for other investors who were not properly advised by their brokers concerning RCNs and who have likewise suffered an investment loss, much like the retired couple referenced in the current action