RBC Capital Markets has been ordered by regulators to cough up $1 million in fines and restitution for failing to make sure its reps’ recommendations of junk and municipal bonds were suitable for conservative clients.
The Financial Industry Regulatory Authority released a letter of acceptance, waiver and consent today saying the broker-dealer failed to adequately supervise representatives’ recommendations of the bonds from July 2013 to June 2016.
“As a result, the firm failed to identify for review more than 100 customer accounts with conservative profiles for potentially unsuitable concentration levels of high-yield bonds,” said Finra in the notice.
RBC has 275 branch offices in the United States and 2,400 registered reps.
In its analysis, Finra said that RBC’s procedures didn’t go far enough to consider the suitability factor of the high-yield bonds that its reps were recommending, saying only that the securities involved a higher degree of risk and possible loss of principal. Mortgage issues were also said to simply offer a higher level of risk that needed to be disclosed to customers.
“Until 2015, [RBC’s] procedures did not include guidance as to how much of a customer’s portfolio should be invested in these products based on the customer’s investor profile,” Finra said.
Also during the period under review, RBC used daily and monthly alerts to identify high concentrations of possibly unsuitable junk bonds in customer accounts. But the alerts became disabled when changes were made to the tax coding of the system. Thus, 100 accounts belonging to conservative customers didn’t get the usual flag.
“RBC first discovered that the alerts were defective in September 2015. The firm did not fix the alerts until July 2016. During this 10-month period, the firm did not adopt alternate measures to identify potentially unsuitable concentrations in high-yield bonds. The firm also did not notify supervisors that the alerts were not working as intended and that they could not rely on the alerts for their reviews,” Finra said in its letter.
As a result of its failure to establish, maintain and enforce a supervisory system, RBC was censured and ordered to pay a $550,000 fine. The firm was also ordered to pay $456,155 in restitution and interest.
“Because of the increased risks associated with high-yield bonds, Finra has repeatedly reminded member firms of their sales practice obligations in connection with such products,” the letter went on to say. “For example, in Notice to Members 04-30, Finra noted the ‘substantial’ risks associated with high-yield bonds and reminded firms of their obligation to determine that such bonds are suitable for the customers to whom they are
recommended.”