More On Legal & Compliancefrom The Advisor's Professional Library
- The New and Improved Form ADV Whether an RIA is describing its investment strategy in advertisements or in the new Form ADV Part 2, it is important the firm articulates material risks faced by advisory clients and avoids language that might be construed as a guarantee.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
In its latest crackdown on improper use of collateralized debt obligations, the Securities and Exchange Commission on Tuesday charged RBC Capital Markets LLC for misconduct in the sale of unsuitable investments to five Wisconsin school districts. RBC Capital agreed to pay more than $30 million to settle the charges.
According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic CDOs.
The SEC says the school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. “The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts,” the SEC said. The SEC also said that RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments.
RBC Capital agreed to settle the SEC’s charges by paying $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund.
Last month, the SEC separately charged St. Louis-based brokerage firm Stifel, Nicolaus & Co. and a former senior executive with fraudulent misconduct in connection with the same sale of the CDO investments to the school districts. Other SEC enforcement actions related to the offer and sale of CDOs include Goldman Sachs, ICP Asset Management, J.P. Morgan, and Wachovia Capital Markets.
“RBC failed Securities 101 when it sold complex derivatives that were unsuitable to five school districts without fully informing them of the risks,” said Robert Khuzami, director of the SEC’s Division of Enforcement, in a statement.
According to the SEC’s order, the five school districts are Kenosha Unified School District No. 1, Kimberly Area School District, School District of Waukesha, West Allis-West Milwaukee School District, and the School District of Whitefish Bay.
The SEC said the board members and business managers for the school districts had no prior experience investing in CDOs or instruments tied to CDOs. “Compared to the typical buyers of instruments tied to CDOs, the school districts were not sophisticated investors,” the SEC said. The SEC’s order finds that “the school districts lacked sufficient knowledge and sophistication to appreciate the nature of such investments.”
RBC Capital consented to the entry of the SEC’s order without admitting or denying any of its findings. The order censured RBC Capital and directed that it cease and desist from committing or causing any violations and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, which among other things prohibit obtaining money by means of an untrue statement of material fact and engaging in any transaction, practice, or course of business that operates as a fraud or deceit upon the purchaser.
RBC Capital agreed to pay disgorgement of $6.6 million, prejudgment interest of $1.8 million, and a penalty of $22 million.