Today, the Financial Industry Regulatory Authority (FINRA) announced that Wells Fargo Investments, LLC was fined $2 million for making unsuitable investments in connection with the sale of reverse convertible notes and for failing to provide required sales charge discounts on Unit Investments Trust (UIT) transactions. FINRA also took the unusual step of requiring Wells Fargo to pay restitution to customers who did not receive UIT discounts and to those who were placed in unsuitable reverse convertibles. More often than not, FINRA will levy a fine on the brokerage firm and leave investors to fend for themselves and try to recoup their losses through FINRA’s securities arbitration process.
What are Reverse Convertible Securities?
Reverse convertibles are short-term investments that are tied to an underlying stock or bond. When the security matures, the investor will receive either 100% of the original investment or a predetermined number of shares. When investing in reverse convertibles, investors risk losing a significant portion of their investment if the value of the underlying stock or bond falls below a certain level at maturity. For example, in a reverse convertible bond fund, an investor may be forced to redeem their bonds at a decreased value.