In his blog “Another Wall Street Product Failure”, Jake Zamansky  described how Wall Street was at it again issuing complex, high risk investments called “reverse convertible notes” to investors, and reportedly under investigation by the Securities and Exchange Commission.  These “reverse convertibles” are notes that appear to the investor on the surface to be safe and secure short-term obligations linked to a stock or index.  In truth, the “reverse convertibles” carry hidden enormous exposure in volatile markets that can wipe out the unsuspecting investor, and represent unsuitable investments.

The “reverse convertibles” act similarly to shorting a put option. The risk-reward ratio is likewise skewed against the investor. For a small percentage return on the note, the investor has exposure to potentially unlimited downside risk. If the stock performs well, the investor is safe.  If not, the investor suffers devastating losses.  Try getting this straight risk assessment from your broker who may get a larger commission on selling you a structured product.  Such a ratio is usually unsutiable for any risk-adverse investor or investor preserving assets for retirement.

FINRA has warned Wall Street firms that it should qualify investors for “reverse convertibles” in the same way that it qualifies investors for risky options trading.  Unlike options trading, there is no unified risk disclosure surrounding “reverse convertibles” which explains how they work or the various risks.

Despite the warnings, most brokerage firms lack standardized procedures for qualifying investors for trading in “reverse convertibles” or other structured products. If a true qualification process revealed that an investor has safety, principal preservation or conservation as an investment objective, then the investor should not be permitted to purchase the “reverse convertible” or structured product. It would be an unsuitable investment.

For example, in November 2010, FINRA imposed a $500,000 fine on former Ferris, Baker Watts LLC, acquired by RBC Management LLC, for inadequate supervision of sales of unsuitable notes to over 57 accounts held by elderly customers. In October 2010, H&R Block was fined $200,000 by FINRA for failing to put a proper supervision system in place for reverse convertible sales to ensure suitability.

Wall Street firms lack strict qualification processes or disclosure practices because it would upend the record $52 billion in revenues in 2010 from structured product sales.

If you suffered a loss in a reverse convertible note, or had stock shares put to you for a loss, you may wish to contact us for a free evaluation of whether the purchase was unsuitable for you.  Please contact Jake by telephone at 212 742-1414 or email at

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