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Banks and Brokers Recommending Risky Reverse Convertibles to Combat Volatility Despite Prior Discipline

Though one might think banks and brokerages would choose simplicity in the wake of February's volatility-induced panic when uninformed brokers took on too much risk, it turns out the market for complexity is growing, even as regulators continues to admonish firms for unsuitably recommending reverse convertibles and other complex structured products.

For example, UBS Financial Services in 2016 paid a $15 million settlement over its reverse convertible notes business after the SEC charged the firm with failing to supervise its staff in selling these complex products, resulting in unsuitable recommendations.

Additional firms dinged for poor practices, negligent disclosure failures, or unsuitable recommendations related to reverse convertible and structured note sales include Merrill Lynch, RBC Capital Markets, and Wells Fargo, a firm against which we successfully arbitrated to final award such a reverse convertible dispute; these are only a sample of the many instances of reverse convertible misconduct in the securities industry.

According to a Bloomberg report, the new investment de jour is the "barrier reverse convertible," a return to the reverse convertible, as money managers opt for structured products that combine bonds with additional complex securities, and is backed by firms such as UBS Group AG.

In order to hedge against predicted price declines caused by stock volatility increases, money managers have reportedly gravitated toward reverse convertibles, or revcon securities products, in order to make use of this anticipated volatility climb.

For example, statistics indicate that banks in Switzerland sold 32% more structured obligations in the first quarter of 2018 compared to the same period in 2017, with notes like reverse convertibles comprising 47% of the sales.

Revcons aren't just a Swiss security—these products are sold in the United States, too, and have drawn FINRA's attention.

In 2015, FINRA reissued an investment alert first published in 2011 warning investors that reverse convertibles, as complex investment vehicles, can harm conservative- and moderate-risk tolerant investors due to their complexity. FINRA noted that revertible notes or reverse exchangeable securities with features of a debt instrument and derivative may be marketed as yield-enhanced bonds—which result in higher coupon payment over the course of the note's life—but come with some significant drawbacks, such as giving the issuer a put option on the underlying asset or being shut out of any benefit from the underlying asset's upside appreciation.

Then there are the fees which are earned for each and every RevCon sold or rolled-over, and whether the broker who sold the reverse convertible managed to adequately disclose the revcon's full range of features, risks, rewards, and drawbacks.

If you have invested with a broker or financial adviser who has recommended a complex structured product, such as a reverse convertible, that was not suitable given your investment objective and risk tolerance preferences, and this unsuitable recommendation has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

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