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Regulation and Compliance > Federal Regulation > SEC

RBC to Pay $3.9M for Share Class Violations

By Jeff Berman

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RBC Capital Markets agreed to pay $3.9 million to settle charges by the Securities and Exchange Commission that it failed to disclose potential conflicts of interest when it recommended and sold certain mutual fund share classes to some retail retirement account and charitable organization brokerage customers.

The firm “fully cooperated” with the SEC’s review of its mutual fund sales, part of a multi-firm review of those products, RBC’s broker-dealer and RIA division, RBC Wealth Management, said in a statement Monday.

“RBC Wealth Management is committed to ensuring the firm and all of its advisors operate in accordance with the regulations governing our industry,” the firm said, adding: “In the rare case that an issue arises, we work quickly to address it, compensate clients and put into place processes to prevent it from happening in the future. In response to this particular issue, we converted affected accounts, as needed, to the correct mutual fund share class. We have also reviewed and updated all procedures and policies related to mutual fund share classes.”

From at least July 2012 through August 2017, RBC recommended and sold certain customers more expensive mutual fund share classes when less expensive share classes in the same funds were available, the SEC had claimed.

In an order that the SEC announced Friday, the regulator said RBC made the recommendations in question without disclosing that it would receive greater compensation from the customers’ purchases of the more expensive share classes. The order further found that RBC did not disclose that the more expensive share classes would negatively impact the overall return on the investments because of the different fee structures for the different mutual fund share classes, the SEC said.

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,” according to the SEC order.

As a result of RBC’s failures, about 4,571 customer accounts paid a total of $2.6 million in 12b-1 sales charges, ongoing fees and other expenses, the SEC said. The SEC’s order found that RBC violated the antifraud provisions of the Securities Act of 1933.

Without admitting or denying the SEC’s findings, RBC consented to cease-and-desist from future violations of these provisions, to be censured and to pay a total of $3.9 million that included disgorgement of $2.6 million, with prejudgment interest of $631,331 and a civil penalty of $650,000, the regulator said.

The SEC recently ordered Merrill Lynch to reimburse investors $325,376 for failing to disclose its conflict of interest when selecting more expensive mutual fund share classes for its advisory clients when lower-cost share classes were available for those clients. Merrill Lynch and New York-based Eagle Strategies both self-reported as part of the SEC Division of Enforcement’s Share Class Selection Disclosure Initiative. A third advisory firm, Cozad Asset Management of Champaign, Illinois, also self-reported within months of the initiative’s self-reporting deadline, the SEC said.

As part of the same initiative, the SEC on March 11, 2019, ordered 79 investment advisors to reimburse more than $125 million to clients. Those firms included Wells Fargo Advisors Financial Network and Wells Fargo Clearing, Ameritas, Cambridge Investment Research, Commonwealth Equity Services, D.A. Davidson & Co., Deutsche Bank Securities, Janney Montgomery Scott, Kestra Advisory Services, LPL Financial, Next Financial, Oppenheimer & Co., Oppenheimer Asset Management, Raymond James Financial Services Advisors, RBC Capital Markets, Robert W. Baird & Co., Stifel & Nicolaus & Co. and Woodbury Financial Services.

Jeff Berman

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