On April 12, 2011, the Financial Industry Regulatory Authority (FINRA)fined Santander Securities of Puerto Rico ("Santander") $2 million for misconduct related to the recommendation and sale of reverse convertible securities to retail customers. Among other things, the fine was based on FINRA's findings that Santander's brokers sold risky reverse convertible securities to elderly investors who were not willing or able to accept the high risk of loss associated with reverse convertible securities. Santander also was required to pay back $ 7 million in customer losses.
Reverse convertibles are a type of structured product. They are interest bearing notes in which principal repayment is linked to the performance of a reference asset - often a stock, a basket of stock or an index. FINRA found that Santander did not have a system in place for reviewing or approving the reverse convertible securities before offering the securities to customers. Despite the fact that Santander Securities' brokers were selling millions of dollars of these securities, Santander also failed to properly train and guide its brokers regarding the risks of reverse convertible securities and which types of investors were appropriate for investing in the securities. Santander's systematic failures led to unsuitable recommendations and sales of the structured products and significant losses by customers.
Brad Bennett, FINRA Chief of Enforcement, said "Santander Securities failed its customers through significant deficiencies in its systems and procedures, which allowed unsuitable recommendations of concentrated positions in risky reverse convertibles - sometimes using funds that the firm helped customers borrow - to proceed without detection or review."
Santander Securities of Puerto Rico is based on Guaynabo, Puerto Rico. It sold more than $130 million in reverse convertibles during the period that was the focus FINRA's review, and it collected more than $1.7 million in commissions selling those securities. Starting in 2006, Santander sold structured products that were issued by mutual funds that were part of the First Puerto Rico Family of Funds. These funds were managed by Santander Asset Management. In 2007, the First Puerto Rico Family of Funds began offering reverse convertibles that were sold by Santander Securities.
FINRA found that Santander did not even present these securities to a new product committee for review and approval before it recommended and sold the securities to investors. FINRA also found that the securities were not registered even though the securities did not qualify for an exemption from qualification.
We are happy to see that Santander has been fined and forced to compensate certain investors for their reverse convertible losses. But we believe that many additional Santander investors who lost money in reverse convertibles deserve to be compensated as well.