Finra fines Santander Securities; firm reimburses customers $7 million for reverse convertible losses

By Jennifer Chiou

New York, April 12 - The Financial Industry Regulatory Authority (Finra) announced that it has fined Santander Securities of Puerto Rico $2 million for certain practices in its structured product business, adding that Santander has reimbursed more than $7 million to its customers for losses that resulted from reverse convertible securities.

According to a news release, Finra noted, among other violations, unsuitable sales of reverse convertibles to retail customers as well as inadequate supervision of structured products sales and accounts funded with loans from its affiliated bank.

Santander is further required to review its training, supervision and written procedures, the release stated.

"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," Brad Bennett, Finra executive vice president and chief of enforcement, said in the release.

Finra added that the firm had no process in place for reviewing or approving any particular structured product prior to offering the product to a customer.

In November 2007, for example, Santander Securities recommended that a retired couple in their 80s with a moderate risk tolerance and a long-term growth objective invest in a single reverse convertible position of over $100,000, which represented 85% of their account value and more than half of their liquid net worth, the release stated. The investment ultimately resulted in a loss of over $88,000.

In addition, some Santander Securities brokers recommended that customers use funds borrowed from the firm's banking affiliate to purchase reverse convertibles. The release noted that many customers lost money on their investments and owed additional money to the bank when the value of the reverse convertibles declined and the bank sold the product at a loss.

Finra said that Santander failed to have adequate supervisory procedures in place to monitor customers' accounts pledged as collateral for these loans.

Finra is an independent regulator for securities firms doing business in the United States.

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