Wednesday, February 17, 2010

FINRA Fines H&R Block Financial Advisors

February 16, 2010 – 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.

Saturday, February 13, 2010

FINRA Regulatory Notice: Reverse Convertibles


February 12, 2010 - FINRA Reminds Firms of Their Sales Practice Obligations With Reverse Exchangeable Securities (Reverse Convertibles)

The Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 10-09 reminding financial firms selling reverse convertibles notes (RCN) to provide fair and balanced sales materials and communications, including proper statement on the risks associated with such notes.

In an upcoming SLCG study on RCN, we have found that investors of RCNs have been overcharged by brokerage firms. The extent of the overcharge is so great that the expected return of RCNs 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 also provides to the public free valuation tools for certain structured products such as principal protected notes and leveraged index-linked notes.   

Tuesday, February 9, 2010

FINRA Regulatory Notice: Variable Annuities

February 8, 2010 - FINRA Reminds Firms of Their Responsibilities Under FINRA Rule 2330 for Recommended Purchases or Exchanges of Deferred Variable Annuities

The Financial Industry Regulatory Authority (FINRA) published Regulatory Notice 10-05 reminding firms of their responsibilities concerning deferred variable annuities. Annuities can carry costs and risks that many investors may not be aware of because brokers who are incentivized by commission-generation do not make them clear to investors. Costs include surrender charges on the investor who seeks to withdraw money during a pre-specified ‘surrender period’, and fees such as advisory fees, administrative fees and mortality and expense charges.

Dr Craig McCann, founder of SLCG, has written a White Paper on a type of annuity called equity-indexed annuities. In the paper, he concludes that these annuities are too complex for unsophisticated investors to understand and that their complexity masks their true costs. Furthermore, the lack of disciplinary recourse for those who engage in sales practice abuse makes investors even more vulnerable to the loss money. Equity-indexed annuities’ surrender charges can range from 10% to 25% of net asset and the surrender period can last as long as 10 years. Other features such as participation rates, which is a fraction of the return of the index to which the annuities are tied, and caps, which is the maximum return that the investor can receive, limit the overall return of these annuities. Thus investors must be diligent enough to understand the detailed features of equity-indexed annuities.

SLCG has written other papers on annuities. You may find at our dedicated website research on related products and markets.