Massachusetts is investigating sales of structured notes known as reverse convertibles, said Brian McNiff, a spokesman for the Secretary of State’s office. McNiff declined to comment further.
State regulators are seeing an “influx of concerns and complaints” about structured products, particularly so-called principal-protected notes and reverse convertibles, Joseph Borg, director of the Alabama Securities Commission, said in an interview earlier this year. Brokers who sell the investments sometimes don’t understand them, said Borg, a former North American Securities Administrators Association president.
Reverse convertibles pay set interest rates that are generally higher than those of corporate bonds. The risk lies in an embedded option that gives the issuer the right to repay investors with shares if the underlying stock plummets.
Demos, a New York-based public policy research group, and the Nation Institute, a nonprofit publishing group, earlier reported the investigation in a joint study released last week.