Bloomberg News

RBC to Pay Massachusetts Up to $3.2 Million in ETF Claims

May 02, 2012

Royal Bank of Canada has agreed to reimburse Massachusetts investors as much as $2.9 million and pay a $250,000 fine over sales of leveraged and inverse exchange-traded funds.

RBC Capital Markets LLC, a U.S. subsidiary of the Montreal- based bank, sold the products between 2006 and 2009 to clients “whose investment objective did not fit the inherent risk” of the funds, according to a statement today from William F. Galvin, Secretary of the Commonwealth. The settlement resolves an administrative complaint brought against RBC in July.

“The company was selling products it did not understand, and when it finally realized the risk and pitfalls of these investments it did not immediately restrict their marketing,” Galvin, Massachusetts’ top securities regulator, said in the statement.

The Financial Industry Regulatory Authority, or Finra, yesterday announced settlements with Citigroup Inc., Morgan Stanley, UBS AG and Wells Fargo & Co. over similar claims. The banks paid a combined $9.1 million in fines and restitution. Finra warned brokers in June 2009 that leveraged and inverse ETFs were difficult to understand and not a good fit for long- term investors.

“We fully cooperated throughout this matter and have in place extensive policies, procedures and training requirements that are in compliance with regulatory requirements and with industry best practices in this arena,” Jonell Lundquist, an RBC spokeswoman, said in an e-mailed statement.

ETFs typically track indexes and trade throughout the day on an exchange like stocks. Leveraged versions use swaps or derivatives to amplify daily index returns, while the inverse funds are designed to move in the opposite direction of their benchmark. Because gains or losses in the funds are compounded daily, returns over more than one day can differ from returns implied by the underlying index.

To contact the reporter on this story: Christopher Condon in Boston at ccondon4@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net


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