FINRA offices in New York Outside FINRA offices in New York. (Photo: Ronald Pechtimaldjian)

The Financial Industry Regulatory Authority fined RBC Capital Markets $2.9 million on Oct. 16 for the way it handled exchange-traded fund, exchange-traded note and mutual fund sales for clients.

The case dated back to September 2007, when RBC Dain — a brand that was later phased out — was fined $500,000.

From July 2003 to October 2004, the broker-dealer failed to ensure the delivery of prospectuses in connection with the sale of certain registered securities, deliver product descriptions to clients that bought ETFs and failed to maintain reasonable supervisory systems and procedures related to the delivery of product descriptions and prospectuses, FINRA said in its decision.

In 2007, without admitting or denying any allegations or findings, RBC Dain agreed to a $500,000 fine, a penalty of a censure and to provide the New York Stock Exchange with a written certification stating that its policies and procedures were reasonably designed to achieve compliance with the federal securities laws and NYSE rules applicable to the delivery of prospectuses and product descriptions.

While RBC Dain provided the required certification in December 2007,  the firm failed to make the required delivery of prospectuses to clients who bought about 165,000 ETFs and ETNs and “at least hundreds of thousands of mutual funds” from March 2008 to June 2016, the regulatory group explained.

RBC also “failed to design, implement, and enforce a reasonable supervisory system, procedures, and set of controls to comply with prospectus delivery rules for ETFs, ETNs and mutual funds and as a result, failed to discover the delivery failures until FINRA’s investigation into the matter,” the regulatory group said.

Details of Problems

During that eight-year stretch, RBC’s prospectus delivery process for ETFs and ETNs “involved manually inputting coding for individual securities into third-party software to trigger the delivery” of a prospectus when a customer bought the security, according to FINRA.

Over that time period, clients bought more than 5 million ETFs and ETNs from RBC, which relied on just one employee, who manually assigned the codes to ETFs and ETNs on a security-by-security basis; no supervisory systems or controls were in place to monitor or supervise the employee’s performance of those duties, FINRA said.

As a result, RBC failed to detect that one employee had “inadvertently caused the system to overwrite the trailer codes that triggered prospectus delivery and failed to identify new ETFs and ETNs requiring a trailer code,” according to FINRA.

After discovering the extent of the coding errors in June 2015, RBC’s efforts to address the issues weren’t effective, while its supervisory system related to prospectus delivery for mutual funds also was “not reasonably designed,” FINRA said.

In March 2008, RBC merged with an affiliate and started using a new automated vendor system to identify mutual fund purchases requiring prospectus delivery. But during that same eight-year period, the vendor system didn’t correctly designate for prospectus delivery certain customer mutual fund orders placed via RBC’s managed accounts platform, FINRA said.

RBC’s supervisory system included a written procedure obligating the firm to designate an employee to conduct periodic supervisory reviews to determine if securities products were properly coded for prospectus delivery, FINRA noted.

When it came to mutual funds, RBC “failed to assign these supervisory duties, thereby failing to enforce this procedure, and thus these duties were not performed for more than eight years,” FINRA noted, adding: “As a result, the absence of appropriate coding for at least hundreds of thousands of mutual fund purchases was not discovered until FINRA’s investigation in this matter.”

RBC also “failed to establish, maintain or enforce supervisory controls to test and verify that it was delivering ETF, ETN and mutual fund prospectuses where required,” according to the document.

As part of the recent settlement, FINRA also required RBC to certify within 120 days that it established and implemented a supervisory system and written procedures reasonably designed to achieve compliance with FINRA rules and the federal securities laws applicable to prospectus delivery.

In settling the matter, RBC neither admitted nor denied the charges but consented to the entry of FINRA’s findings.

As of Sept. 30, RBC Wealth Management had $384 billion in total client assets with more than 1,900 financial advisors operating in 170 locations in 42 states.