FINRA Orders RBC Capital Markets, LLC to Pay $1.4 Million for Failing to Supervise Unsuitable Sales of Reverse Convertible Securities

In what appears to be another example of broker-dealers continuing to ensure that the wrong speculative securities are sold to the wrong investors, the Financial Industry Regulatory Authority (FINRA) announced in a News Release on April 23, 2015 that RBC Capital Markets, LLC was fined approximately $1 million and ordered to pay restitution of approximately $400,000 for the firm’s failure to supervise the unsuitable sale of reverse convertible securities to public investors.  According to FINRA Letter of Acceptance, Waiver and Consent No. 2010022918701 (AWC), a reverse convertible securities are “a complex structured product” that are interest-bearing notes in which principal repayment is linked to the performance of an underlying asset like a stock, a basket of stocks, or an index like the S&P 500.

In the News Release, FINRA’s Chief of Enforcement is quoted as stating: “[s]ecurities firms must ensure that their brokers understand the inherent risks associated with the complex products they are selling, and be able to determine if they are suitable for investors before recommending them to retail customers. When the firm establishes suitability guidelines, it must police the transactions to ensure they appropriately meet their own criteria.”

According to the AWC, RBC had faulty policies and procedures in place that did not appropriately supervise the recommendation of reverse convertibles to public investors.  RBC’s failure to supervise the recommendation of reverse convertibles also occurred because the policies and procedures in place were not effectively enforced, according to the AWC.  The AWC detailed that RBC failed to detect that more than a quarter of transactions in reverse convertibles “were unsuitable” and were inappropriately recommended to public investors with lower than necessary income, net assets, net worth and/or investment experience, or risk tolerances.

Broker-dealers are the gatekeepers of the securities markets for most public investors, and are thus charged by the securities laws and industry rules to reasonably ensure that registered representatives, who are licensed to recommend securities purchases and sales, do not engage in violative behavior.  These rules, including NASD Rule 3010 (now FINRA Rule 3110) set forth that “[f]inal responsibility for proper supervision shall rest with the member.”  RBC was fined by FINRA because it failed in these responsibilities related to reverse convertible securities, a complex structured product.

Malecki Law has successfully handled securities arbitrations concerning issues related to unsuitable complex securities recommendations and sales by registered representatives of broker-dealers.  If you believe you have suffered losses as a result of questionable actions taken in your securities account, please contact us immediately for a confidential consultation.