RBC Capital's Unsuitable Concentration in High-Yield Bonds Nets $1 Million Settlement

RBC Capital Markets consented to FINRA's findings and agreed to pay $1 million to settle charges that the firm failed to identify and review more than 100 customer accounts with conservative investment preferences for unsuitable high-yield bond concentrations.

For example, one elderly customer who was over 100 years old and a trustee for two trust accounts both with conservative investment objectives experienced an over-concentration in both accounts such that 86% of the first and 100% of the second trust account consisted of risky high-yield municipal bonds, which greatly exceeds RBC Capital's upper limit for customers with low risk or conservative investment objectives. Another customer, a 70-year-old client, similarly co-owned a conservative-objective account that saw an over-concentration of as much as 92% in high-yield bonds.

According to AWC #2017054432703, RBC over a three-year period failed to establish, enforce, and maintain a supervisory system that would have helped identify red flags for certain problematic sales practices, including recommendation and overconcentration of certain high-yield bonds to customers with conservative-preferred risk tolerance levels, meaning that these elderly clients' accounts were not reviewed for concentration.

FINRA's report indicates that even though the regulator cautioned firms about obligations when it comes to selling high-yield or junk bonds at greater risk of default, RBC nonetheless did not have an adequate supervisory system in place and, accordingly, allowed 100+ of its customer accounts to become over-concentrated with risky high-yield bond products.

Investigators concluded that RBC not only didn't have an adequate review system in place, it completely failed to review the 100+ accounts for unsuitable concentrations whatsoever.