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RBC Capital to Pay $1M for Failing to Police High-Yield Bond Investments

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What You Need to Know

  • RBC failed to identify for review more than 100 client accounts for unsuitable concentration levels of high-yield bonds, FINRA says.
  • The firm agreed to pay a $550,000 fine and restitution of $456,155 plus interest to clients.
  • RBC discovered its alerts were defective in September 2015 but did not fix the alerts until July 2016, FINRA alleged.

RBC Capital Markets has agreed to pay $1 million to settle allegations by the Financial Industry Regulatory Authority that it failed to identify for review more than 100 client accounts with conservative profiles for potentially unsuitable concentration levels of high-yield bonds.

Without admitting or denying FINRA’s findings, RBC signed a FINRA letter of acceptance, waiver and consent on Tuesday in which it agreed to a censure and to pay a $550,000 fine and restitution of $456,155 plus interest to clients. FINRA signed the letter on Wednesday.

From July 2013 through June 2016, RBC “failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures, reasonably designed to achieve compliance with FINRA and MSRB rules with respect to representatives’ recommendations of high-yield corporate and municipal bonds,” according to the AWC letter.

As a result of its supervisory failures, RBC violated NASD Rules 3010(a) and (b)(1) and FINRA Rules 3110(a), (b)(1) and 2010 with respect to the firm’s supervision of high-yield corporate bonds, and MSRB Rules G-27(b) and (c) with respect to its supervision of high-yield municipal bonds, according to FINRA.

“We are deeply committed to careful management of the wealth clients entrust to us,” an RBC spokesperson told ThinkAdvisor on Thursday. “As a firm, we pride ourselves on having strong policies and procedures in place to protect our clients. In the rare instance those policies and procedures fall short, we take steps to address them.”

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The spokesperson added: “We fully cooperated with FINRA and are pleased to have amicably resolved this case. This matter involves restitution to just 20 accounts and an issue that occurred and was fixed more than five years ago.”

In July 2013, RBC changed the tax coding of municipal bonds in its system, according to the AWC letter. “This coding change inadvertently disabled the ability of the high-yield bond alerts to identify potential concentration issues for further assessment,” the letter went on to say.

FINRA added: “As a result, the firm did not review more than 100 conservative customer accounts for potentially unsuitable concentrations in high-yield corporate and municipal bonds. RBC did not detect that these alerts were not working, in part, because the firm did not test its alerts during the relevant period.”

RBC discovered that the alerts were defective in September 2015 but did not fix the alerts until July 2016, FINRA alleged.

During that 10-month period, the firm didn’t adopt alternate measures to identify potentially unsuitable concentrations in high-yield bonds, and also did not notify supervisors the alerts weren’t working as intended and that they could not rely on the alerts for their reviews, according to FINRA.