RBC fined in U.S. over sale of reverse convertibles

Thu Apr 23, 2015 1:12pm EDT
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By Jonathan Stempel

April 23 (Reuters) - A U.S. regulator ordered a Royal Bank of Canada unit to pay $1.43 million to resolve charges it sold high-yielding securities known as reverse convertibles without properly assessing whether they were suitable for investors who bought them.

Thursday's settlement with RBC Capital Markets LLC calls for the payment of a $1 million fine and $434,000 of restitution. RBC neither admitted nor denied wrongdoing in agreeing to settle charges by the Financial Industry Regulatory Authority.

Also known as reverse exchangeable securities, reverse convertibles typically consist of interest-bearing notes in which repayment of principal is tied to the performance of an unrelated asset, such as a basket of stocks.

The securities carry high yields because investors may not recoup their principal if the unrelated asset's value falls below a certain "knock-in" or "barrier" level.

FINRA said that from 2008 to 2012, RBC handled more than 100,000 reverse convertible transactions in at least 5,000 accounts, but did not ensure they were all suitable based on customers' investing goals, income, net worth and experience.

It said this led to $1.1 million of losses on 364 reverse convertible transactions in 218 accounts belonging to customers for whom the securities were unsuitable.

RBC paid some affected customers to settle a class-action lawsuit, and FINRA said it ordered restitution to the remainder.

RBC Wealth Management, a unit of RBC Capital Markets, in a statement said it began making improvements in early 2013 to ensure proper supervision and controls, and "is committed to meeting all guidelines set forth by industry regulators." It also said it cooperated fully with FINRA. (Reporting by Jonathan Stempel in New York; Editing by Bernard Orr)