August 27, 2010 – HSBC’s Unsuitable sale of Inverse Floating Rate CMOs to Retail Customers and Related Supervisory Failures

The Meissner firm is currently investigating potential claims by investors who were recommended the unsuitable sale of inverse floating rate Collateralized Mortgage Obligations (CMO) by HSBC Securities (USA) Inc. (HSBC).

HSBC was recently fined $375,000 by the Financial Industry Regulatory Authority (FINRA) for recommending the unsuitable sales of such investments to its retail customers. According to FINRA, “HSBC failed to adequately supervise the suitability of the CMO sales and fully explain the risks of an inverse floating rate or other risky CMO investment to its customers.” Since 1993, FINRA has advised firms that inverse floating rate CMOs “are only suitable for sophisticated investors with a high-risk profile.” However, contrary to such guidance, HSBC did not implement adequate supervisory systems and procedures in conjunction with the sale of such securities to its retail customers, nor did they provide certain educational materials before the sale of such CMOs, which are required to be provided to purchasers who are not institutional investors. The sales of 43 of such high risk investments, not suitable for HSBC’s unsophisticated retail customers, were made by six of the brokerage firm’s brokers.

In addition to such violations of suitability requirements, FINRA found that in 25 of the 43 CMO sales HSBC was guilty of failing to abide by its own supervisory procedures which required a supervisor’s pre-approval of any sale in excess of $100,000; in five of such instances the customers investments in such inverse floating rate CMOs resulted in losses and HSBC has already paid full restitution of $320,000 in connection to such losses.

“Firms must adequately train their brokers on all of the products that they are selling and must reasonably supervise them to ensure that every security recommended is suitable for the particular customer,” said James S. Shorris, FINRA Executive Vice President and Acting Chief of Enforcement. “The losses incurred by HSBC’s customers likely would have been avoided had the firm sufficiently trained its brokers on the suitability and risks of inverse floating rate CMOs and reasonably supervised their brokers to ensure that they were making suitable recommendations.” FINRA found that HSBC did not provide its brokers with sufficient guidance and training regarding the risks and suitability of CMOs nor did the brokerage firm provide its registered representatives with information regarding the risks associated with the specific inverse floaters that were available to be sold.

If you were a victim of such impropriety and have sustained substantial losses by investing in inverse floating rate CMOs through HSBC, you may be entitled to recover damages. Please contact the Meissner firm, which is nationally known for its record win statistics in FINRA Arbitration, for a free consultation.