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FINRA (The Financial Industry Regulatory Authority) settled an enforcement action and entered into an Acceptance Waiver & Consent with HSBC Securities (USA) Inc., which included a $375,000 fine, for recommending unsuitable sales of inverse floating rate Collateralized Mortgage Obligations (CMOs) to retail customers.
FINRA found that HSBC failed to supervise the suitability the sales of CMOs to customers and also failed to fully disclose or explain the risks of these inverse floating rate securities and or other risky CMO investments to its customers.
FINRAfound that HSBC failed to implement an adequate supervisory system and that its brokers made the unsuitablesales of inverse floaters to were unsophisticated investors not suited for high-risk investments.
FINRA also found that 25 sales were in amounts exceeding $100,000 and that in five of these instances, customers lost money in their inverse floating rate CMO investments.
FINRA Executive Vice President and Acting Chief of Enforcement, James S. Shorris, said "The losses incurred by HSBC's customers likely would have been avoided had the firm sufficiently trained its brokers on the suitability and risks of inverse floating rate CMOs and reasonably supervised their brokers to ensure that they were making suitable recommendations."
A CMO is a fixed income security that pools mortgages and issues tranches with various characteristics and risks.
One of the more risky CMO tranches is the inverse floater, a type of tranche that pays an adjustable rate of interest that moves in the opposite direction from movements of an interest rate index, such as LIBOR. FINRA has told its members that that inverse floating rate CMOs are only suitable for sophisticated investors with a high-risk profile, (but apparently HBSC did not get the memo).
FINRA found that HSBC did not provide its brokers with sufficient guidance and training regarding the risks and suitability of CMO, and did not inform registered representatives that inverse floaters were only suitable for sophisticated investors with a high-risk profile.
During the relevant time period, HSBC did not advise its registered persons that they were required to offer written educational material to their customers before they sold them CMOs. Although HSBC provided its brokers with a CMO brochure, the brokers did not offer the brochure to every CMO investor, nor did they know that they were required to give the materials to all potential CMO investors before selling them a CMO. Moreover, the brochures did not comply with FINRA's content standards. In particular, the brochure failed to discuss inverse floaters and failed to include a section on risks associated with purchasing CMOs.
Nicholas J. Guiliano, Esquire, Guiliano Law Firm, P.C. (877) SEC-ATTY |
