Reverse Convertible Note

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Reverse Convertible Note

A security that combines aspects of a stock and a bond. An RCN operates like a debt security that pays a fixed coupon, which is usually higher than the coupons for regular bonds. At maturity, the holder may choose to receive a certain amount of stock or cash equal to the value of that stock. RCNs allow the investor to diversify his/her portfolio while only incurring the expense of a single investment vehicle.
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Reverse convertible securities (also called reverse convertible bonds, reverse convertible notes, or revertibles) typically consist of a short-term promissory note issued by an investment bank such as Barclays or Societe Generale combined with a put option on an unrelated equity.
Some of the more significant cases involved the sale of collateralized mortgage obligations (five cases, $760,000 in total fines), closed-end funds (three cases, $1 million in total fines), and reverse convertible notes (two cases, $710,000 in total fines).
The SLCG study reports that despite substantial overpricing in the offerings and the significant losses on the reverse convertible notes in 2008 and 2009, there have been a substantial number of new issues of these dubious investments by JP Morgan, Barclays and many other brokerage firms in 2010.
WASHINGTON -- The Financial Industry Regulatory Authority (FINRA) today announced that it has fined the former Ferris, Baker Watts LLC, acquired by RBC Wealth Management, $500,000 for inadequate supervision of sales of reverse convertible notes to retail customers as well as unsuitable sales of reverse convertibles to 57 accounts held by elderly customers who were at least 85 years old and customers with a modest net worth.
70% reverse convertible notes series 26 due July 12, 2001, linked to the ordinary shares of Canon Inc.