Banco Santander SA, Spain's largest bank, will pay $2 million to resolve U.S. regulatory claims that its Puerto Rico-based brokerage improperly sold risky structured financial products to retail customers including the elderly.
Santander Securities, which has reimbursed customers for more than $7 million in losses on so-called reverse convertible notes, failed to properly train brokers as sales grew in 2007 and 2008, the
Financial Industry Regulatory Authority said today. The Washington-based regulator said last month that it was conducting a sweep to survey advertising for the securities.
“Santander Securities failed its customers through significant deficiencies in its systems and procedures, which allowed unsuitable recommendations of concentrated positions in risky reverse convertibles,” Brad Bennett, Finra's chief of enforcement, said in a statement. Santander resolved the claims without admitting or denying the allegations, Finra said.
A spokesman for Santander in Madrid, who asked not to be named in line with company policy, declined to comment.
Reverse convertibles, generally marketed to individuals, are short-term bonds that convert into stock if a company's share price plummets. They offer high interest rates, with notes paying 13 percent on average last year, according to data compiled by Bloomberg. Banks sold $6.76 billion of the securities to U.S. investors last year, the data show.
In November 2007, Santander recommended that a retired couple in their 80s, with a moderate risk tolerance and long- term growth objective, invest more than 85 percent of their account and more than half of their net worth in a single reverse convertible position, Finra said. The couple, who has since been reimbursed, lost $88,000 of a $100,000 investment on the deal, the regulator said.
In some instances, brokers recommended that customers use funds borrowed from the firm's banking affiliate to purchase the securities, claiming it would enable them to profit on the interest-rate spread between the instrument and the loan, Finra said. Those recommendations substantially increased the clients' risk, and some people who lost money then owed additional funds to the bank when the notes lost value, the regulator said.
Finra fined two brokerages last year over the products. Ferris, Baker Watts LLC, which was acquired by Royal Bank of Canada in 2008, was ordered to pay $690,000 to resolve Finra's claims that it failed to supervise reverse-convertible sales. H&R Block Financial Advisors Inc., acquired by
Ameriprise Financial Inc. in 2008, was fined $200,000 for a lack of supervisory systems. Neither brokerage admitted wrongdoing.
--Bloomberg News--
