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Poor Supervisory Controls Put RBC In Regulatory Crosshairs

Massachusetts Commonwealth Secretary charges RBC Capital Markets with supervisory failures

The Massachusetts Secretary of the Commonwealth William Galvin has filed a complaint that RBC Capital Markets’ (RBC) failure to enforce policies and procedures in its oversight of one of its members’ one-size-fits-all investment strategy that overconcentrated clients in a single investment sector.

What was the one-size-fits-all investment strategy?

For nearly 20 years, RBC Capital Markets (RBC) registered representative Bruce Cameron provided services to Massachusetts investors. Beginning ten years ago, Cameron shifted to a one-size-fits-all investment strategy that was out of compliance with the firm’s internal compliance procedures and missed by compliance oversight.

Cameron, who joined RBC in 2002, began, in 2013, to recommend clients invest in Master Limited Partnerships (MLPs). Typically used in the energy sector, MLPs combine the liquidity of a common stock with the tax liability of a partnership. The value is tied directly to the price of the natural resource underlying the MLP and exposes investors to a significant risk of loss if the energy market fails to perform as expected. Moreover, the tax consequences of energy sector MLPs may pose considerable risks to retirement or other tax-exempt accounts.

Did Cameron’s MLP strategy conflict with RBC?

Yes. Cameron found his niche recommending MLPs and other energy sector securities to his clients. By the mid-2010s, the strategy became the mainstay of his practice. This conflicted with RBC’s policy not to permit advisers to concentrate more than 30 percent of a client’s account in a single sector,

Hence the compliance failure. Cameron routinely invested at least 50 percent of clients’ accounts in energy sector MLPs and securities, regardless of the clients’ circumstances, and in direct conflict with RBC’s policies. Between 2013 and 2017, Cameron recommended the purchase or sale of at least $30,000,000 worth of energy sector MLPs.

Is RBC responsible for the sins of this RIA?

Likely, because compliance matters. The Massachusetts Secretary found that RBC did not adequately enforce its policies and procedures with respect to Cameron and other RBC representatives. While Cameron invested $30,000,000 in energy sector MLPs, RBC’s compliance software, ProSurv, flagged only 36 out of the over 700 MLP transactions Cameron effected. And then, RBC approved the flagged transactions. By “rubber-stamping” Cameron’s recommendations, the Secretary says that RBC put its clients and their finances at risk.

What does Massachusetts want?

In addition to the expected “cease and desist” of these practices, the Secretary is asking for a review of supervisory procedures and the engagement of an independent compliance consultant to review and establish written policies and procedures related explicitly to overconcentration. The Commonwealth also wants a verified accounting of all proceeds received and restitution paid to compensate investors for all losses attributable to Cameron’s activities.

Could this lack-of-oversight have been avoided?

Yes. It bears repeating that a vigilant, well-run compliance system can spot irregularities and give an attentive compliance team a chance to nip exposures before they get out of hand. Patrina can help. We’ve built our business based on helping organizations keep track of “bad apples,” and stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective systems specifically designed for the financial services and insurance industries. Be smart. Be covered.Let’s talk.