Finra fines RBC Wealth unit over brokers' sales of 'unsuitable' investments

Oct 20, 2010 @ 1:53 pm

By Bloomberg

RBC Wealth Management unit will pay $690,000 to resolve a brokerage regulator’s claims that a U.S. unit sold unsuitable financial products to elderly clients and others with modest net worth.

Ferris, Baker Watts Inc., which was acquired by RBC in 2008, failed to supervise brokers who sold so-called reverse convertible notes to about 2,000 retail investors from 2006 to 2008, the Financial Industry Regulatory Authority said today. The company also failed to monitor the accounts to ensure they properly reflected customers’ needs, Finra said in a statement.

Regulators have increased scrutiny of financial products after retirees and pension funds claimed losses on investments they didn’t understand. Reverse convertibles are structured notes that pay set interest rates generally higher than those of corporate bonds, while giving issuers the right to repay investors with shares if the underlying stock plummets.

“Reverse convertible notes are complex investments that often entail significant risk of loss and also involve terms, features and risks that can be difficult for retail investors to evaluate,” James Shorris, Finra’s acting enforcement chief, said in the statement. The sales to elderly customers and those with “modest assets” were “unsuitable,” he said.

In one instance, Ferris, Baker Watts sold an 86-year-old retired social worker five reverse convertibles for $10,000 each, making up 25 percent of her portfolio, Finra said. The firm also sold five reverse convertibles to a 20-year-old clerk who was earning less than $25,000 a year, the regulator said.

RBC Wealth Management, without admitting or denying Finra’s allegations, agreed to pay a $500,000 fine and about $190,000 in restitution to 57 account holders, the Washington-based regulator said.

A call to RBC wasn’t immediately returned.

Banks have sold $5.3 billion of reverse convertibles to U.S. investors this year, according to data compiled by Bloomberg. RBC has sold about $474.2 million of the notes this year, the data show.

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