Canada Stockwatch – RBC Fined $1m For Lack Of Supervision in Sale of Reverse Convertibles

Canada Stockwatch – A Royal Bank of Canada (TSE:RY, Mkt cap 115.88B, P/E 12.79, Div/yield 0.77/3.84, EPS 6.28, Shares 1.44B) unit has been ordered to pay US$1.43 million after it was found to have failed to assess whether reverse convertibles were suitable for investors prior to selling them.

Canada Stockwatch Royal Bank Canada ordered pay $1.43 million

Canada Stockwatch – A Royal Bank of Canada unit has been ordered to pay US$1.43 million.

As Reuters reports, the Financial Industry Regulatory Authority (FINRA) has told RBC Capital Markets LLC it must pay a fine of US$1 million, in addition to US$434,000 of restitution.

RBC was not prepared to admit or deny the charges following last week’s settlement, but it has agreed to pay the amounts ordered of it.

Reverse convertibles, which are sometimes called reverse exchangeable securities, usually comprise interest-bearing notes in which repayment of principal depends on the performance of an unrelated asset, such as a basket of stocks.

Due to the uncertain nature of whether they will earn their principal, as the unrelated asset’s value could drop below a certain “knock-in” or “barrier” level, the securities carry potentially high yields for investors.

FINRA revealed that in the four-year period from 2008 to 2012, RBC was accountable for more than 100,000 reverse convertible transactions in at least 5,000 accounts, but it did not carry out the necessary checks to see if they were all suitable based on customers’ investing targets, net worth and experience.

This oversight led to US$1.1 million of losses on 364 reverse convertible transactions in 218 accounts belonging to customers for whom the securities were not well matched, the regulator said.

A class-action lawsuit against RBC resulted in the bank paying some affected customers a sum for their losses, while FINRA has ordered restitution for the remainder.

RBC Wealth Management, a unit of RBC Capital Markets, responded to the charges in a statement, saying it began making the necessary improvements to ensure proper supervision and controls in 2013.

Canada Stockwatch – RBC recently raised its quarterly dividend by 2.7%, to $0.77 a share from $0.75. The new annual rate of $3.08 yields 3.8%. The stock trades at just 11.6 times Royal’s forecast 2015 earnings of $6.54 a share.

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