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RBC CAPITAL * * * * * * * * * * * * * * * * * |
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CONSENT ORDER DOCKET NO. CO-10-7808-S |
I. PRELIMINARY STATEMENT
II. CONSENT TO WAIVER OF PROCEDURAL RIGHTS
WHEREAS, RBC, through its execution of this Consent Order, voluntarily waives the following rights:
1. |
To be afforded notice and an opportunity for a hearing within the meaning of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177(a) of the General Statutes of Connecticut; |
2. |
To present evidence and argument and to otherwise avail itself of Sections 36b-15(f), 36b-27(a) and 36b-27(d)(2) of the Act and Section 4-177c(a) of the General Statutes of Connecticut; |
3. | To present its position in a hearing in which it is represented by counsel; |
4. | To have a written record of the hearing made and a written decision issued by a hearing officer; and |
5. | To seek judicial review of, or otherwise challenge or contest the matters described herein, including the validity of this Consent Order; |
NOW THEREFORE, the Commissioner, as administrator of the Act, hereby enters this Consent Order.
III. JURISDICTION AND CONSENT TO ENTRY OF CONSENT ORDER
RBC admits the jurisdiction of the Commissioner and consents to the entry of this Consent Order by the Commissioner. RBC neither admits nor denies the Findings of Fact and Conclusions of Law contained in this Consent Order, and nothing in this Consent Order shall be construed as an admission of fraud by RBC. |
IV. FINDINGS OF FACT
Auction Rate Securities
Auction rate securities are long-term bonds issued by municipalities, corporations and student loan companies, or perpetual equity instruments issued by closed end mutual funds, with variable interest rates that reset through a bidding process known as a Dutch auction.
1.
2.
At a Dutch auction, bidders generally state the number of auction rate securities they wish to purchase and the minimum interest rate they are willing to accept. Bids are ranked, from lowest to highest, according to the minimum interest rate each bidder is willing to accept. The lowest interest rate required to sell all of the auction rate securities available at auction, known as the “clearing rate,” becomes the rate paid to all holders of that particular security until the next auction. The process is then repeated, typically every 7, 28 or 35 days.
3.
When there are not enough orders to purchase all of the auction rate securities being sold, a “failed” auction occurs. In the event of a failed auction, investors cannot sell their auction rate securities.
4.
As an underwriter of auction rate securities, RBC also acted as the managing broker-dealer for certain issues of auction rate securities. When acting as sole manager, RBC was the only firm that could submit bids into the auction on behalf of its clients and/or other broker-dealers who wanted to buy and/or sell any auction rate securities. When acting as lead manager, RBC was the primary firm that could submit bids into the auction, while other broker-dealers were able to submit orders on behalf of their clients as well. RBC received revenue in connection with auction rate securities, including an underwriting fee representing a percentage of total issuance and a fee for managing the auctions.
RBC Made Misrepresentations to Certain Investors in Connection With
the Sale of Auction Rate Securities
5.
RBC represented to certain of its customers that auction rate securities were highly liquid, safe, cash alternative investments.
6.
These representations were misleading as to certain investors. Auction rate securities were, in fact, different from cash and money market funds. As discussed above, the liquidity of an auction rate security relied on the successful operation of the Dutch auction process. In the event of a failed auction, investors could not sell their auction rate securities and were left holding long-term investments, not cash-equivalent securities. Starting in the Fall of 2007, the auction rate securities market faced dislocation and an increased risk of failure.
7.
Since the inception of the auction market, RBC submitted support bids, purchase orders for the entirety of an auction rate security issue for which it acted as the sole or lead broker. Support bids were RBC proprietary orders that would be filled, in whole or in part, if there was otherwise insufficient demand in an auction. When RBC purchased auction rate securities through support bids, those auction rate securities were then owned by RBC and the holdings were recorded on RBC’s balance sheet. For risk management purposes, RBC imposed limits on the amounts of auction rate securities it could hold in inventory.
8.
Because many investors could not ascertain how much of an auction was filled through RBC proprietary trades, investors could not determine if auctions were clearing because of normal marketplace demand, or because RBC was making up for the lack of demand through support bids. Generally, investors were also not aware that the auction rate securities market was dependent upon RBC’s use of support bids for its operation. While RBC could track its own inventory as a measure of the supply and demand for auction rate securities, ordinary investors had no comparable ability to assess the operation of the market. There was no way for investors to monitor supply and demand in the market or to assess when broker-dealers might decide to stop supporting the market, which could cause its collapse.
9. | In August 2007, the credit crisis and other deteriorating market conditions strained the auction rate securities market. Some institutional investors withdrew from the market, decreasing demand for auction rate securities. |
10. | The resulting market dislocation should have been evident to RBC. RBC support bids filled the increasing gap in the demand for auction rate securities, sustaining the impression that the market was functioning. As a result, RBC’s auction rate securities inventory grew significantly, requiring RBC to raise its risk management limits on its auction rate securities inventory several times. |
11. | From the Fall of 2007 through February of 2008, demand for auction rate securities continued to erode and RBC’s auction rate securities inventory reached unprecedented levels. RBC was aware of the increasing strains on the auction rate securities market, increasingly questioned the viability of the auction rate securities market and planned for potential widespread market failure. RBC did not disclose these increasing risks of owning or purchasing auction rate securities to all of its customers. |
12. | In February 2008, RBC and other firms stopped supporting most auctions. Without the benefit of support bids, much of the auction rate securities market collapsed, leaving investors who had been led to believe that these securities were cash alternatives and liquid investments, appropriate for managing short-term cash needs, holding long-term or perpetual securities that could not be sold at par value. |
V. CONCLUSIONS OF LAW
13. | The Commissioner has jurisdiction over this matter pursuant to the Act. |
14. |
The Commissioner finds that RBC failed to reasonably supervise its agents and engaged in dishonest or unethical practices in the securities business; that this conduct violated Sections 36b-4(b) of the Act and Section 36b-31-6f(b) of the Regulations; and that grounds therefore exist to initiate administrative proceedings against RBC under Sections 36b-15(a) and 36b-27 of the Act; |
15. |
The Commissioner finds that this Consent Order and the following relief are appropriate, in the public interest, and consistent with the purposes fairly intended by the policies and provisions of the Act. |
VI. CONDITIONS PRECEDENT
Definitions
1. |
For purposes of these Conditions Precedent and this Consent Order, the following terms shall have the meanings specified:
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Conditions Precedent and Representations by RBC
Relief for Eligible Investors Who Sold Below Par
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VII. CONSENT ORDER
On the basis of the Findings of Fact, Conclusions of Law, and RBC’s consent to the entry of this Consent Order,
IT IS HEREBY ORDERED THAT:
1. |
This Consent Order concludes the investigation by the Division and any other action that the Commissioner could commence under the Act on behalf of Connecticut as it relates to RBC’s marketing and sale of auction rate securities to RBC’s Eligible Investors as defined herein. |
2. |
This Consent Order is entered into solely for the purpose of resolving the referenced multi-state investigation, and is not intended to be used for any other purpose. |
3. |
RBC shall CEASE AND DESIST from violating the Act or any regulation or order under the Act, and shall comply with the Act, its regulations and any order under the Act. |
4. |
Within ten (10) days after the entry of this Consent Order by the Commissioner, RBC shall pay to the “Treasurer, State of Connecticut”, by electronic funds transfer or wire transfer, the sum of Thirty Three Thousand Four Hundred Three and 22/100 Dollars ($33,403.22) as an administrative fine. |
5. |
In the event another state securities regulator determines not to accept RBC’s state settlement offer in connection with the multi-state investigation referenced herein, the total amount of the Connecticut payment shall not be affected, and shall remain at Thirty Three Thousand Four Hundred Three and 22/100 Dollars ($33,403.22). |
6. |
To the extent that RBC agrees to any subsequent settlement with any NASAA jurisdiction arising out of the above-referenced coordinated investigations pertaining to RBC’s marketing and sale of Eligible ARS to Eligible Investors as described herein, which subsequent settlement includes a term or terms analogous to the terms herein, but which are more favorable to Eligible Investors in such NASAA jurisdiction than those terms identified herein, the subsequent more favorable settlement term or terms shall, upon the Commissioner’s request, be incorporated by reference into this Consent Order and become equally applicable to Connecticut Eligible Investors. |
7. | RBC shall not, collectively or individually, seek or accept, directly or indirectly, reimbursement or indemnification, including, but not limited to, payment made pursuant to any insurance policy, with regard to any or all of the amounts payable pursuant to paragraph 4 above. |
8. | If payment is not made by RBC, or if RBC defaults in any of its obligations set forth in this Consent Order or fails to abide by its representations set forth herein, the Commissioner may vacate this Consent Order, at his sole discretion, upon ten (10) days notice to RBC, and without opportunity for administrative hearing. |
9. | This Consent Order is not intended to indicate that RBC or any of its affiliates or current or former employees shall be subject to any disqualifications contained in the federal securities laws, the rules and regulations thereunder, the rules and regulations of self regulatory organizations or various states’ securities laws, including any disqualifications from relying upon the registration exemptions or safe harbor provisions. In addition, this Consent Order is not intended to form the basis for any such disqualifications. |
10. | For any person or entity not a party to this Consent Order, this Consent Order does not limit or create any private rights or remedies against RBC including, without limitation, the use of any e-mails or other documents of RBC or of others for the marketing and sale of auction rate securities to investors, nor does it limit or create liability of RBC, or limit or create defenses of RBC to any claims. |
11. | Nothing herein shall preclude Connecticut, its departments, agencies, boards, commissions, authorities, political subdivisions and corporations, other than the Commissioner and only to the extent set forth in paragraph VII.1 above, (collectively, “State Entities”) and the officers, agents or employees of State Entities from asserting any claims, causes of action, or applications for compensatory, nominal and/or punitive damages, administrative, civil, criminal, or injunctive relief against RBC in connection with the marketing and sale of auction rate securities by RBC. |
12. | This Consent Order shall not disqualify RBC or any of its affiliates or current or former employees from any business that they otherwise are qualified or licensed to perform under applicable state law, and this Consent Order is not intended to form the basis for any disqualification. |
13. | This Consent Order and any dispute related thereto shall be construed and enforced in accordance with, and governed by, the laws of the State of Connecticut without regard to any choice of law principals. |
14. | This Consent Order shall be binding upon RBC and its successors and assigns as well the successors and assigns of relevant affiliates with respect to all conduct subject to the provisions herein and all future obligations, responsibilities, undertakings, commitments, limitations, restrictions, events and conditions. |
NOW THEREFORE, the Commissioner enters the following:
1. | The Findings of Fact, Conclusions of Law and Consent Order set forth above, be and are hereby entered; |
2. | Entry of this Consent Order by the Commissioner is without prejudice to the right of the Commissioner to take enforcement action against RBC based upon a violation of this Consent Order or the matters underlying its entry, if the Commissioner determines that compliance with the terms herein is not being observed or if any representations made by RBC and reflected herein are subsequently discovered to be untrue; and |
3. | This Consent Order shall become final when entered. |
So ordered at Hartford, Connecticut | _______/s/_________ | |
this 19th day of July 2010. | Howard F. Pitkin | |
Banking Commissioner |
CONSENT TO ENTRY OF ORDER
I, Richard Chase, state on behalf of RBC Capital Markets Corporation, that I have read the foregoing Consent Order; that I know and fully understand its contents; that I am authorized to execute this Consent Order on behalf of RBC Capital Markets Corporation; that RBC Capital Markets Corporation agrees freely and without threat or coercion of any kind to comply with the terms and conditions stated herein; and that RBC Capital Markets Corporation voluntarily consents to the entry of this Consent Order, expressly waiving any right to a hearing on the matters described herein. RBC Capital Markets Corporation further agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any state, federal or local tax for any administrative monetary penalty that RBC Capital Markets Corporation shall pay pursuant to the foregoing Consent Order.
RBC Capital Markets Corporation | |
By: | ______/s/___________________________ |
Name: Richard T. Chase | |
Title: Managing Director & General Counsel |
County of: New York
On this the 15th day of July, 2010, before me, Helena Han, the undersigned officer, personally appeared Richard T. Chase, who acknowledged himself/herself to be the General Counsel of RBC Capital Markets Corporation, a corporation, and that he/she, as such General Counsel, being authorized to do so, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself/herself as General Counsel.
_________/s/________________________
Notary Public
Date Commission Expires: August 23, 2012