Security - Check Permissions

MFDF - Mutual Fund Directors Forum - FINRA Issues Investor Alert on Reverse Convertibles

Member Login

Request an account

Sample Banner 1

FINRA Issues Investor Alert on Reverse Convertibles

Recently, FINRA issued an investor alert warning about "reverse convertibles," also known as "revertible notes" or "reverse exchangeable securities," structured financial products popularly marketed as vehicles offering high yields.  FINRA issued the alert at this time in order to inform investors of the features and risks of reverse convertibles, and also to explain in clear language that these structured products "are complex investments that often involve terms, features and risks that can be difficult for individual investors and investment professionals alike to evaluate."

FINRA further warns investors considering a reverse convertible, to "be prepared to ask your broker or other financial professional lots of questions about the product's risks, features and fees and why it's right for you."

Reverse convertibles are debt obligations of an issuer that are "tied to the performance of an unrelated security or basket of securities."   According to the investor alert, reverse convertibles may be appropriate for an investor:

who wants a higher stream of current income than is currently available from other bonds or bank products—and who is willing to give up any appreciation in the value of the underlying asset. But, in exchange for these higher yields, investors in these products take on significantly greater risks.

In exchange for high coupon rates or "stated" rates in times when markets are expected to be flat, and the convenience of not having to buy futures and options separately that would allow them to take advantage of certain market conditions, investors subject themselves to some downsides, including:


FINRA's investor alert offers some suggestions on key issues to look out for when investing in convertibles, as well as a list of ways investors can look out for themselves in the complicated world of reverse convertibles.

The full text of FINRA's investor alert is available at: