Reverse Convertible Note Investments

July 18th, 2013
by Daniel Carlson
Stock Market

Stock Market (Photo credit: Ahmad Nawawi)

Daniel Carlson is a lawyer in San Diego focused on securities litigation who specializes in recovering investment losses for his clients.

A reverse exchangeable security (also known as a “reverse convertible”) is a type of structured investment product. These are complex investments that involve features, terms, and risks that are very difficult for investors to understand.

Firms that offer reverse convertible investments have been put on notice by FINRA of the high risk in these products in order to ensure that the promotional materials and public communications employed regarding these products are both fair and balanced. It is important that these materials do not understate the reality of the risks associated with reverse convertible investments. Moreover, member firms must also remember to make sure that their registered financial representatives comprehend the terms, costs, and risks associated with reverse convertible investments. With this understanding, these representatives should perform adequate analyses on each customer’s suitability prior to a recommendation and explain thoroughly all risks and returns involved.

Prior to a recommendation involving either the purchase or sale of a given security, financial firms must form a reasonable basis upon which to determine that the products not only suitable for at least some investors, but also suitable for each specific customer to whom the adviser recommends that particular product. The suitability of a reverse convertible investment must be reviewed carefully. This requires firms to comprehend and explain the risks, terms, costs, and conditions of these structured products. Firms must grasp a reverse convertible’s terms and features in a comprehensive manner. These include the reverse convertible’s payout structure, the volatility of the reference asset, the product’s credit, market and other risks, call features, and the conditions under which the investor would or would not receive a full return of principal.

Given that each reverse convertible is unique, firms have to perform this suitability analysis for each reverse convertible investment that they recommend.

A firm’s consideration of product benefits to a specific customer (like the promise of a certain coupon rate, for example) must consider the risk to the investor. Investment firms and advisors are required to deal fairly with customers when recommending investments or accepting orders for new financial products. Firms must make every effort to communicate clearly to customers any pertinent information regarding these products.

If you think that you have been the victim of investment fraud, related to reverse convertible investments or another form of securities fraud, contact Daniel Carlson at the Carlson Law Firm today for a free consultation at 619-544-9300. Also, be sure to follow my firm on LinkedIn and Twitter.

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