The Financial Industry Regulatory Authority (Finra) announced it has fined Santander Securities of Puerto Rico $2 million for deficiencies in its structured products business.
Finra said the company sold unsuitable reverse convertible securities to retail customers, had inadequate supervision of structured product sales, and had inadequate supervision of accounts funded with loads from its affiliated bank.
Santander has already paid more than $7 million in reimbursements to customers related to losses from reverse convertible securities. In addition to the fine, the firm is required to review its training, supervision and written procedures for its brokers in the area of structured products.
Finra says that between September 2007 and September 2008, the firm failed to detect certain accounts with concentrated interests in risky structured products, specifically reverse convertibles, leading to the unsuitable recommendation of structured products and significant loss by customers.
In one case, Finra says the company recommended a retired couple in their 80s, with moderate risk tolerance and long-term growth goals, to invest in a single reverse convertible position worth more than $100,000, representing 85% of their total account value and more than half of their liquid worth. The investment ultimately lost $88,000. In another instance, Santander recommended that a 36 year old with no investment experience, moderate risk tolerance and long-term growth goals invest $95,000 into a single reverse convertible position, resulting in a loss of $80,000.
Additionally, brokers recommended that customers use funds borrowed from its banking affiliate to purchase the reverse convertibles, claiming it would allow customers to capture the spread between the interest paid on the loan and the higher coupon rate they received from the convertibles. However, the recommendations exposed customers to greater risk, causing them to lose money on the convertibles and owe money to the bank.
"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," says Brad Bennett, FINRA Executive Vice President and Chief of Enforcement.
Santander Securities consented to Finra's findings while neither admitting nor denying the charges.