Lack of adequate controls led to customers being steered toward more expensive fund share classes
RBC Capital Markets has agreed to pay US$3.9 million over charges that it failed to disclose potential conflicts of interest when it recommended and sold higher-cost mutual-fund share classes to a number of retail retirement account and charitable organization brokerage customers.
As explained in an order from the U.S. Securities and Exchange Commission (SEC), the RBC subsidiary recommended and sold certain Class A shares, which come with an up-front sales charge, or Class B or C shares, which come with back-and contingent deferred sales charges and higher ongoing fees and expenses, to the customers in question from at least July 2012 through August 2017.
However, the customers were actually eligible for less expensive options such as load-waived Class A and no-load Class R shares.
Aside from omitting material information concerning its compensation when recommending the more expensive share classes, RBC failed to explain that the customers’ overall investment returns would be negatively impacted by their purchases of the more expensive shares.
The SEC order noted that during the relevant period, RBC did not have adequate systems and controls to ascertain which retirement plans and charitable account customers were qualified to avail of load-waived Class A or Class R shares. All in all, RBC was found to have fallen short in at least 16,475 transactions across an estimated 2,391 accounts of eligible customers.
“Eligible Customers paid a total of $2,607,676 in up-front sales charges, CDSCs, and higher ongoing fees and expenses from purchases of mutual fund share classes,” the SEC said.
RBC Wealth Management, RBC’s broker-dealer and RIA division, neither admitted nor denied the charges.
In a statement Monday, the firm said it “fully cooperated” with the SEC’s review of its mutual fund sales.
“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, noting that it has converted the affected accounts to the correct share classes, and has reviewed and updated its policies and procedures governing mutual fund share classes.