Corona Virus Plagues Risky Structured Products, Reverse Convertibles

Attorney Advising Disclaimer

As the stock market's 2020 coronavirus collapse harms the securities industry's vulnerable structured products class of investment vehicles, the time of reckoning is now for investors seeking to recoup losses as a result of a broker's unsuitable recommendations to purchase these exorbitantly risky investments.

Similar to how leveraged products can amplify losses in a bear market, structured products as prepackaged investments linked to underlying securities assets or derivatives (which might themselves include leveraged components) are most susceptible to failure and collapse in a volatile, rollercoaster-like environment. If a structured product is tied to more than one security, option, or derivative, a financial blow to any one of these linked products could threaten the health of the entire structured product as the hurricane of volatility has multiple chances to dismantle the entire investment.

FINRA previously issued an Investor Alert regarding Reverse Convertibles, warning customers of the rev-cons' potentially harmful complexity and risk. In 2016, the SEC ordered UBS Financial Services to pay $15 million to settle charges regarding unsuitable reverse convertible note sales practices and related supervisory violations associated with that firm's Airbag and Trigger Yield Optimization products.

In other words, the risk posed by reverse convertibles and structured products is not a new phenomenon and as the SEC found in 2016 with UBS, firms that unsuitably market risk to conservative-to-moderate investors may be liable for violations of suitability or supervision.

While different brokerage firms tend to use different brand names for reverse convertibles—some of which include JP Morgan's Reverse Exchangeable Notes, UBS & Barclays' Reverse Convertible Notes, and Morgan Stanley's ELKS—the products are fundamentally similar in structure in that basic reverse convertible repayments of principal are linked to a certain reference asset or basket of securities.

The reverse convertible's risk, thus, is that if the underlying asset's value falls below a certain level during the note's term—as occurred with many assets during the COVID-19 crisis—investors will receive significantly less than the note's face value by having the linked security put to them instead of a return of principal.

This is sometimes true even if the asset/stock subsequently recovers: if the asset at some point dips below a threshold or trigger price, investors of certain rev-cons may stand to lose money.

Other structured products, such as Citi Bank's Coupon Barrier Autocall Notes (CoBa) or Morgan Stanley's underwritten Stock Participating Accreting Redemption Quarterly-Pay Securities (SPARQs) are callable bonds or notes that expose investors to the risk of losing some or all of principal if the product performs poorly, while limiting the ability to profit by invoking auto-call rules if the product rises in value, above a certain threshold.

When a broker or financial adviser recommends risky reverse convertibles or other complex structured products to a risk-averse investor, the supervising firm might be liable for its broker's misconduct. In addition to UBS paying $15 million in 2016, FINRA in 2018 disciplined Merrill Lynch, RBC Capital Markets and Wells Fargo over unsuitable reverse convertible and structured note sales.

If you suffered losses from an investment in Reverse Convertible Bonds (RCB) or Reverse Convertible Notes (RCN), please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.

Related Posts
  • After $13 Million in Penalties for 'Widespread Failure,' Oppenheimer Fined $500,000 for Supervisory and Suitability Gaps Read More
  • FINRA barred former Independent Financial Group (IFG) broker Brett Arthur Hartvigson of San Diego, California for refusing to cooperate with its investigation into allegations that were part of a complaint. In 2021, while associated with IFG, Brett Harvgi Read More
  • Stifel Nicolaus Failed to Detect Unsuitable Recommendations Despite Risk Policy, Says FINRA Read More