RBC Capital Markets LLC has submitted an offer of settlement to the U.S. Securities and Exchange Commission (SEC) in connection with administrative proceedings in which the brokerage firm is accused of disadvantaging some of its retirement plan and charitable organization clients.
In a newly issued SEC order, the financial markets regulator says it has determined it will accept the settlement offer, in which RBC neither admits nor denies the SEC’s allegations.
According to summary information in the order, from at least July 2012 through August 2017, RBC “disadvantaged certain retirement plan and charitable organization brokerage customers who maintained accounts at RBC by failing to ascertain that they were eligible for a less expensive share class, and recommending and selling them more expensive share classes in certain open-end registered investment companies (mutual funds) when less expensive share classes were available.”
These allegations closely echo those included in a sizable—and growing—number of other sanctions secured by the SEC after the conclusion of its 2018 “Share Class Selection Disclosure Initiative.” That initiative opened up a window during which brokerage firms and registered investment advisers (RIAs) could self-report and correct previous failures to disclose the selection of mutual fund share classes that paid a Rule 12b-1 fee (i.e., revenue sharing) when a lower-cost share class for the same fund was available to clients. Now the other shoe has dropped and the SEC is making good on its pledge to investigate firms that did not self-report potential 12b-1 fee disclosure violations but which it believes may have made such errors.
According to the SEC’s latest order, RBC failed to disclose that it would receive greater compensation from the eligible customers’ purchases of the more expensive share classes.
“Eligible customers did not have sufficient information to understand that RBC had a conflict of interest resulting from compensation it received for selling the more expensive share classes,” the order states. “Specifically, RBC recommended and sold these eligible customers Class A shares with an up-front sales charge, or Class B or Class C shares with a back-end contingent deferred sales charge (CDSC).”
As the SEC explains, CDSCs are basically deferred sales charges the purchaser pays if the purchaser sells the shares during a specified time period following the purchase.
“These eligible customers were eligible to purchase load-waived Class A and/or no-load Class R shares,” the order states. “RBC omitted material information concerning its compensation when it recommended the more expensive share classes. RBC also did not disclose that the purchase of the more expensive share classes would negatively impact the overall return on the eligible customers’ investments, in light of the different fee structures for the different fund share classes.”
In making those recommendations of more expensive share classes while omitting material facts, RBC violated Sections 17(a)(2) and 17(a)(3) of the Securities Act, the SEC says.
“These provisions prohibit, respectively, in the offer or sale of securities, obtaining money or property by means of an omission to state a material fact necessary to make statements made not misleading, and engaging in a course of business which operates as a fraud or deceit on the purchaser,” the order states.
The terms of the order dictate that RBC shall pay disgorgement, prejudgment interest and a civil monetary penalty totaling $3,889,007. Of that amount, the firm shall pay disgorgement of $2,607,676 and prejudgment interest of $631,331. The remaining $650,000 is being assessed as a civil monetary penalty.