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Univ. of Toledo College of Law

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Tuesday, April 12, 2011

FINRA Fines Santander Securities $2 Million for Deficiencies in Structured Product Business

FINRA announced that it fined Santander Securities of Puerto Rico $2 million for deficiencies in its structured product business, including unsuitable sales of reverse convertible securities to retail customers, inadequate supervision of sales of structured products, inadequate supervision of accounts funded with loans from its affiliated bank, and other violations related to the offering and sale of structured products. In addition to paying the fine, the firm is required to review its training, supervision and written procedures in the relevant areas. Santander Securities has reimbursed more than $7 million to its customers for losses that resulted from reverse convertible securities. 

According to FINRA, despite Santander Securities' growing sales in structured products, between September 2007 and September 2008, brokers bore the responsibility of evaluating the products without sufficient suitability guidance or required training on structured products. The firm also had no process in place for reviewing or approving any particular structured product prior to offering the product to a customer. Moreover, the firm did not have effective procedures in place to monitor customer accounts for potentially unsuitable purchases of structured products and had no suitability policies governing product concentration. As a result, the firm failed to detect certain accounts with concentrated positions in certain risky structured products, specifically reverse convertibles. This led to unsuitable recommendations of structured products and significant losses by customers.

For example, in November 2007, 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 percent of their account value and more than half of their liquid net worth. The investment ultimately resulted in a loss of over $88,000. Moreover, some Santander Securities brokers recommended that customers use funds borrowed from the firm's banking affiliate to purchase reverse convertibles, claiming that it would enable the customers to capture the spread between the interest they paid to the bank and the higher coupon rate they received from the reverse convertible. However, these recommendations substantially increased the clients' exposures to risk.

In concluding this settlement, Santander Securities neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

 

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