Santander Securities Corporation of Puerto Rico agreed to pay a $2 million fine to settle FINRA charges it had deficiencies in its structured product business that included unsuitable sales and inadequate supervision.  Additionally, the firm must review its training, supervision and WSP's in the relevant areas.  Santander also had provided more than $7mn in restitution to its customers for losses that resulted from reverse convertible securities. 

FINRA specifically referred to these deficiencies:

• 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;
• other violations re: the offering and sale of structured

'Structured Products' Defined.    They're securities derived from or based on a single security, a group of securities, an index, a commodity, a debt issuance and/or foreign currency.  Structured products may differ on principal protection offered, interest or coupon rates paid, and frequently cap or limit the upside participation in the underlying asset.  Reverse convertibles, a type of structured product, are interest bearing notes in which principal repayment is linked to the performance of a reference asset - often a stock, a basket of stock or an index.

        FINRA Allegations.   Despite Santander Securities' growing sales in structured products, between September 2007 and September 2008, the firm failed to provide its brokers with the necessary tools - i.e., guidance and training - that would have enabled them to adequately evaluate the products they were selling.  In addition, the firm ...

• had no process in place for reviewing or approving any particular structured product prior to offering the product to a customer. 
• did not have effective procedures for monitoring customer accounts for potentially unsuitable purchases of structured products.
• had no suitability policies governing product concentration and, as a result, it failed to detect certain accounts with concentrated positions in certain risky structured products, specifically reverse convertibles.

        Examples of an Unsuitable Recommendation and Sale.  (i)  In November 2007, Santander recommended that a retired couple in their 80s, with a moderate risk tolerance and a long-term growth objective, invest over $100,000 in a single reverse convertible position - representing 85% of their account value and over 50% of their liquid net worth.  The couple ultimately incurred losses of over $88K.   (ii) In November 2007, Santander recommended that an investor, 36, with no investment experience, moderate risk tolerance and a long-term growth objective, invest $95,000 in a single reverse convertible position - representing most of the account value.  The resultant loss approximated $80,000.  

"Adding insult to injury," 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.  The added leverage, however, substantially increased their exposures to risk - so many not only lost money, but owed additional money to the bank when the value of the reverse convertible declined and the bank sold the product at a loss.   Here, too, Santander failed to adequately supervise and monitor customers' accounts pledged as collateral for these loans.

        FINRA Enforcement Staff Credits.   Investigated by Samantha Joseph, Kathryn Wilson, Julie Glynn, and supervised by Director Linda Walters, Regional Chief Counsel David Jaffe.

For additional information, go to:   [FINRA News Release, 4/12]   and  [Santander Securities's AWC, 4/12/11]