The Financial Industry Regulatory Authority (FINRA) of US has imposed a fine of $375,000 on HSBC Securities (USA) for recommending unsuitable sales of inverse floating rate collateralized mortgage obligations (CMOs) to retail customers.
FINRA said 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.
In its investigation, FINRA found that HSBC recommended the sale of CMOs, including inverse floating rate CMOs, to its retail customers.
Six of its brokers made 43 unsuitable sales of inverse floaters to retail customers who were unsophisticated investors and not suited for high-risk investments.
In addition, HSBC’s procedures required a supervisor’s pre-approval of any sale in excess of $100,000.
FINRA found that 25 of the 43 CMO sales were in amounts exceeding $100,000 and that in five of these instances, customers lost money in their inverse floating rate CMO investments.
HSBC has paid these customers full restitution totaling $320,000.
FINRA also found that HSBC failed to comply with a FINRA rule, adopted in November 2003, which requires firms to offer certain educational materials before the sale of a CMO to any person, other than an institutional investor.
FINRA executive vice president and acting chief of enforcement James Shorris said that 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.