Conroe Adviser Sanctioned for Not Fully Disclosing Risks in Market-Linked CDs

May 27

Texas Securities Commissioner Travis J. Iles reprimanded Michael C. De Pippo of Conroe after finding that De Pippo violated his firm’s procedures by failing to fully inform clients about the risks of certificates of deposit whose returns depend on the performance of certain stocks or market indexes.

In a Consent Order entered May 27th, the Securities Commissioner also granted the registration of De Pippo as an investment adviser representative of Tucson, Ariz.-based Secure Investment Management LLC (SIM).

Prior to the consent order, De Pippo had not been registered in Texas since April 2019, when he left BBVA Securities Inc. in The Woodlands, a suburb of Houston. De Pippo has not acted in any registered capacity since that time, meaning he has served an effective 13-month suspension, according to the order.

While employed at BBVA, De Pippo sold market-linked certificates of deposit (MLCDs), a complex variation of a traditional CD. De Pippo violated BBVA’s written supervisory procedures by failing to consider whether MLCDs were suitable for certain customers and discuss significant product risks.

Instead of paying a set interest rate over a period of time like a regular CD, the return of a market-linked CD depends on the performance of an underlying basket of securities. The term length of an MLCD is usually longer than a traditional CD -- up to 10 years.

Certain MLCDs can be “called,” or redeemed prior to maturity, and pay a pre-determined rate of return. But that only happens if the securities or market indexes to which it is tied outperform a specified benchmark.

If the benchmark is not met, the MLCD can’t be redeemed until its maturity date. In that case, the CD’s return is based on the long-term performance of the linked securities or indexes.

De Pippo provided customers with the BBVA risk disclosure document on MLCDs and got their signatures on it, but State Securities Board staff determined that he did not sufficiently discuss with certain customers all of the significant risk factors with the product.

De Pippo recommended and sold MLCDs with a 10-year maturity but also subject to being called once a year. He told customers that MLCDs he and BBVA had sold were routinely called within one to three years, and certain customers considered the MLCD to be a short-term investment rather than one with a 10-year maturity.

One customer told State Securities Board staff that he intended to use the money invested in the MLCD to pay property taxes due within two years of the date he bought the MLCD.

Certain customers did not understand that the securities linked to the CD could underperform benchmarks, meaning the CD wouldn’t get called and would become a long-term, 10-year investment.

De Pippo also told customers that if a MLCD was not called by the bank in one to three years, the customer could sell the MCLD on the secondary market. However, De Pippo did not sufficiently discuss with these customers that the value of the MCLD could be discounted in the secondary market and that they could lose money in such a sale.