The Securities and Exchange Commission announced that RBC Capital Markets LLC has agreed to pay more than $800,000 to resolve charges that it engaged in unfair dealing in municipal bond offerings. The SEC also announced settled charges against Kenneth G. Friedrich, RBC’s former head of Municipal Sales, Trading and Syndication, and Jaime L. Durando, the head of RBC’s municipal syndicate desk.
According to our order, in nearly four years, RBC improperly allocated bonds intended for institutional customers and dealers to parties known in the industry as “flippers,” who then resold or “flipped” the bonds to other broker-dealers at a profit.
— SEC (@SECGov) September 17, 2021
According to the SEC’s order, over a nearly four-year period, RBC improperly allocated bonds intended for institutional customers and dealers to parties known in the industry as “flippers,” who then resold or “flipped” the bonds to other broker-dealers at a profit. In addition, the order finds that, in three instances where an issuer had instructed RBC to place retail customer orders first, RBC violated those instructions by allocating bonds to flippers ahead of orders for retail customers. The order finds that RBC knew or should have known that flippers were not eligible for retail or institutional priority and that allocating bonds to the flippers ahead of customers and other dealers violated RBC’s internal priority policy for allocating municipal bonds in primary offerings. The order also finds that, in certain offerings not underwritten by RBC, RBC improperly obtained bonds for its own inventory by placing orders with flippers, which allowed RBC to circumvent the lower priority it would have been assigned had it attempted to place direct orders with the underwriters.
“We will continue to pursue those who undermine priority rules and crowd out legitimate retail or institutional customers from getting access to newly issued municipal bonds,” said LeeAnn G. Gaunt, Chief of the Division of Enforcement’s Public Finance Abuse Unit.
The SEC previously brought charges of municipal bond offering “flipping” and retail order period abuses in August 2018, December 2018, September 2019, April 2020, July 2020, September 2020, July 2021 and August 2021.
Without admitting or denying the findings, RBC consented to a public administrative and cease-and-desist order that finds it violated the order disclosure, fair dealing, and supervisory provisions of Municipal Securities Rulemaking Board (MSRB) Rules and the related Exchange Act provision, caused the flippers’ violations of the broker registration provisions of the Exchange Act, and failed reasonably to supervise certain of its registered representatives within the meaning of the Exchange Act. The order requires RBC to pay a $150,000 penalty, disgorgement of $552,440, plus prejudgment interest of $160,886, and imposes a censure.
In related actions, the SEC instituted settled proceedings today against Friedrich and Durando. The SEC’s orders find that Friedrich and Durando permitted the improper allocation and sale of new issue bonds to the flippers, and that Friedrich also permitted the improper purchase of new issue bonds for RBC’s own inventory through the flippers. Without admitting or denying the findings, Friedrich and Durando consented to public administrative and cease-and-desist orders finding they violated the order disclosure and fair dealing provisions of MSRB Rules and the related Exchange Act provision, and, as to Friedrich, that he violated the supervisory provisions of MSRB Rules and failed reasonably to supervise Durando within the meaning of the Exchange Act. Friedrich agreed to a censure and to pay a civil penalty of $30,000, and Durando agreed to a censure and to pay a civil penalty of $25,000. Friedrich further consented to a six-month limitation on supervisory activities and a six-month prohibition on trading negotiated new issue municipal securities.
The SEC’s investigation was conducted by Kevin B. Currid, Sue Curtin and Heidi M. Mitza of the Public Finance Abuse Unit and Kathleen B. Shields of the Boston Regional Office, with assistance from Deputy Unit Chief Mark Zehner and Public Finance Abuse Unit members Joseph Chimienti, Laura Cunningham, Warren Greth, Cori Shepherd, and Jonathan Wilcox.