Tuesday, June 22, 2010

FINRA Issues Investor Alert Regarding Reverse Convertibles

FINRA has issued a warning on its website to investors of Reverse Exchangeable Securities ("Reverse Convertibles").

Although often described as debt instruments, Reverse Convertibles are debt obligations of the issuer that are tied to the performance of an unrelated security or basket of securities. The Alert describes Reverse Convertibles as far more complex than a traditional bond and involve elements of options trading. In addition, Reverse Convertibles expose investors not only to risks traditionally associated with bonds and other fixed income products—such as the risk of issuer default and inflation risk—but also to the additional risks of the unrelated assets, which are often stocks.

FINRA issued the alert to inform investors of the features and risks of reverse convertibles that can be difficult for individual investors and investment professionals alike to evaluate. According to FINRA, if investors are considering purchasing Reverse Convertibles, it is critical that they look beyond the high coupon rate and focus on the risks of the underlying asset. FINRA warns ivnestors that even if the issuer of the reverse convertible is able to meet its obligations on the note—and even if the yield keeps pace with or surpasses inflation—investors could wind up, when the note matures, with shares of a depreciated—or even worthless—asset. Click here for the Full Investor Alert.

If you have suffered losses in Reverse Convertibles and would like more information, or would like to consult with an attorney on a confidential basis, contact SLG at 415-217-7300 or fill out our contact form.


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