RBC Stockbroker Wins Expungement of ARS Complaints
September 12, 2018
SIDE BAR: For background on the RBC ARS settlement:
- SEC v. RBC Capital Markets Corporation (Complaint, United States District Court for the Southern District of New York, May 26, 2009)
https://www.sec.gov/litigation/complaints/2009/comp21066-rbc.pdf - SEC v. RBC Capital Markets Corporation (Consent of RBC, United States District Court for the Southern District of New York, May 14, 2009)
https://www.sec.gov/litigation/litreleases/2009/lr21066-rbc-consent.pdf
As set forth in the SEC's 2009 Complaint against RBC under the heading "Nature of the Action":
1. This is a case in which RBC failed properly to disclose in communications with customers the increasing risks associated with auction rate securities ("ARS") that RBC underwrote, marketed and sold. ARS are long-term bonds or preferred stock with interest rates or dividend yields that are periodically reset through auctions that typically, occur on a weekly or monthly basis. A significant portion of RBC's business was underwriting ARS issues and managing ARS auctions as remarketing agent. Through its employees and marketing materials, RBC misrepresented to many of its customers that ARS were safe, highly-liquid investments that were substitutes for cash or money-market funds. As a result, numerous customers invested funds in ARS through RBC that they needed or expected to have available on a short-term basis.
2. Historically, in order to prevent the failure of ARS auctions that RBC managed, RBC routinely invested its own capital to make bids in auctions where there was insufficient demand. During the fall of 2007 and early 2008, deteriorating market conditions and falling customer demand caused RBC, in order to prevent auction failures, to acquire much greater amounts of ARS in the auctions it managed, which in turn caused RBC's proprietary inventory of ARS to increase significantly. Consequently, during this time period, RBC considered declining to place bids for its own account at ARS auctions it managed and knew that the risk of failed auctions had materially increased. Despite RBC being aware of these material facts, RBC did not disclose them to customers.
3. On February 11, 2008, for the first time in the twelve-year history of its ARS business, RBC declined to place bids in most of the ARS auctions for which it served as remarketing agent and in which the bids of other market participants were insufficient to satisfy all sell orders. At or around the same time, other broker-:dealers also discontinued their practice of placing bids in auctions. As a result, most auctions failed and RBC's customers were left holding billions of dollars worth of illiquid ARS, instead of the liquid short-term investments RBC had represented ARS to be. RBC's individual and non-institutional customers were left holding more than $800 million in illiquid ARS, while its institutional customers held more than $8 billion in illiquid ARS.
In SEC Finalizes ARS Settlements With Bank of America, RBC, and Deutsche Bank (SEC Release 2009-127 / June 3, 2009) https://www.sec.gov/news/press/2009/2009-127.htm, we are informed that RBC will restore about $800 million in liquidity to its ARS customers and, further, the firm agreed to:
- purchase ARS at par from its customers even if they moved their accounts;
- use its best efforts to provide liquidity solutions for institutional and other customers and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers; and
- pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
The underlying basis for the disputes registered by the customers was that the representation of the underlying investments of all three customers, were liquid and that the customers would be able to liquidate those investments readily if needed.The evidence showed that, as a result of unforeseeable market conditions, the investment vehicles involved were, at least temporarily, not readily liquid. This lack of liquidity was unanticipated and contrary to prior history related to these investments. The evidence further demonstrated that most major brokerage firms working with these investments provided settlement funds to their respective customers, who suffered losses.In this matter, Respondent provided such settlements to all of its 2200 customers affected by the temporary market illiquidity, including the three customers filing the disputes, so that those customers were fully reimbursed. The evidence was clear that the Claimant in this matter was not involved in that settlement determination or payments in any manner.The evidence also demonstrated that all three of the customers were advised that, while these investments would be liquid, there could be no guarantee and that was understood by the customers. Therefore, the claims or allegations of the customers that they were unaware of possible illiquidity issues, were clearly erroneous and false. Additionally, the evidence clearly demonstrated that the Claimant was not involved in any sales practice violations, as demonstrated by the fact that the Claimant made no specific representations to the customers other than providing the public information available regarding investments of the type involved in this matter.Finally, even the customers did not hold Claimant responsible for the issues involved here. The evidence clearly reflected that all three of the customers, all of whom were seasoned investors, continued their investment relationship with Claimant well beyond the resolution of this matter. One such investor actually submitted a letter, which is included in evidence, clearly stating that he did not hold Claimant responsible for the conditions that gave rise to the complaint filed.
Bill Singer's Comment