Wednesday, October 08, 2008

RBC Settles with SEC on Auction Rate Securities

Financial Post, Eoin Callan and Jamie Sturgeon, 8 October 2008

The Royal Bank of Canada will pay a fine and reimburse customers as part of a settlement with U.S. federal and state authorities over its role in the collapse of the auction-rate securities market that left many Americans unable to access savings they had set aside for short-term needs like college tuition and medical expenses.

The largest bank in Canada said it will buy back about US$850-million of auction rate securities from more than two thousand retail clients in the U.S. and pay a US$9.8-million fine as part of an agreement with the Securities and Exchange Commission and New York Attorney General's Office.

The settlement makes RBC one of the first banks in the country to be called to account for its conduct leading up to the credit crisis, which has dragged down the global economy and on Wednesday forced an emergency rate cut by the Bank of Canada in coordination with other countries.

The agreement being pursued by federal authorities comes amid public anger in the U.S. over a plan to bail out banks and pump cash into credit markets.

New York Attorney General Andrew Cuomo said: "In today's economic climate, it's more important than ever for investors to be able to access

their money."

The settlement follows agreements struck between U.S. authorities struck and major international banks, including Merrill Lynch, Bank of America Citigroup, and UBS, which all paid much heavier penalties.

The deal with U.S. enforcement officials and regulators does not close the door on further penalties or pay-outs by RBC over the collapse of the US$330-billion auction-rate securities market that froze in the spring.

RBC said it would participate in an arbitration process overseen by the Financial Industry Regulatory Authority where retail investors may seek further legal damages from the bank.

Canada's largest bank is also facing a class-action law suit from aggrieved clients who claim they were suddenly unable to access holdings they believed were liquid and similar to cash.

The bank also pledged to assist with "liquidity solutions" for institutional clients that were sold the securities but are not covered by the settlement.

The impact of the $850-million repurchase program on RBC's fourth quarter results is currently estimated to be approximately US$30 million on a pre-tax basis, the bank said.

RBC neither admitted nor denied allegations of wrongdoing.
The Globe and Mail, Tara Perkins, 8 October 2008

Royal Bank of Canada has agreed to buy back roughly $850-million (U.S.) worth of auction rate securities from more than 2,000 investors in a settlement reached Wednesday with the Securities and Exchange Commission.

Under the deal, individual investors, small businesses, small non-profits, charities and religious organizations will have the opportunity to sell back to RBC auction rate securities that they bought before the market for the securities collapsed in February, the SEC said.

The agreement with the regulator also requires the bank to use its best efforts to provide liquidity to larger institutional customers who were sold the securities.

RBC said it has neither admitted or denied any allegations of wrongdoing in reaching the settlement. The bank has also agreed to pay a penalty of $9.8-million to the New York Attorney General's office and state securities commissioners. It estimates the total impact of its settlement will be about $30-million (U.S.) pre-tax in the fourth quarter. The bank will hold the securities that it is forced to buy back, and more than 85 per cent of them are rated triple-A.

The proposed settlement includes charges in U.S. District Court alleging that RBC made misrepresentations to its customers when it told them that the securities were safe and highly liquid alternatives to money market investments.

In fact, the liquidity of the securities was premised on RBC providing support bids for auctions when there was not enough customer demand. RBC continued to market the securities as safe even though it knew about escalating liquidity risks in the weeks and months before the market collapsed, and when it stopped supporting the auctions in February there were widespread auction failures for RBC customers, the SEC said.

The SEC was working in co-operation with the New York Attorney General's Office, the North American Securities Administrators Association, and the Financial Industry Regulatory Authority.

“Our goal when we approached the regulators was to create liquidity for our retail clients who hold auction rate securities, and we are pleased that this has been accomplished,” an RBC spokeswoman said.

The settlement follows similar agreements that the SEC has struck with numerous other banks that were larger players in the $330-billion market for auction rate securities, including Citigroup, UBS Securities, Wachovia, Merrill Lynch and Bank of America.

In a note to clients, BMO Capital Markets analyst Ian de Verteuil said Royal Bank's settlement is towards the lower end of the range of potential costs to settle this issue, and it shouldn't have any impact on the stock price.

Bank of America also struck a settlement with the SEC Wednesday, agreeing to buy back up to $4.7-billion of securities, and to use its best efforts to provide up to $5-billion in liquidity to institutional investors.

By no later than Dec. 15, RBC must offer to buy, at par, all auction rate securities from individual investors, small business investors with accounts up to $10-million, and investors that are non-profit, charitable or religious organizations with accounts up to $25-million, that bought the securities from RBC before the market collapsed on Feb. 11. Until it buys the securities, it must offer individual investors non-recourse loans at no cost to the borrower.

RBC must use its best efforts by the end of 2009 to provide liquidity to its institutional and business auction rate securities investors with accounts of more than $10-million and non-profit, charitable and religious organizations with accounts of more than $25-million.

The SEC said that RBC faces the prospect of a financial penalty after it has completed all of these obligations. Any penalty will take into consideration the extent of the bank's alleged misconduct in marketing and selling the securities, the extent of the bank's co-operation in the investigation, and the costs incurred by the bank to agree with the provisions of this settlement.

The auction-rate securities market involved investors buying and selling instruments that resembled corporate debt, but the interest rates on the investments were reset at regular auctions, some as frequently as once a week. A number of companies and retail clients invested in the securities because they could treat their holdings almost like cash.

But the market for them collapsed in February amid the downturn in the broader credit markets.