RBC Stockbroker Wins Expungement of ARS Complaints

September 12, 2018

Yet again, FINRA has the opportunity to do right by the hundreds of thousands of registered men and women. Yet again, the plight of the little guy is barely a concern for Wall Street's self-regulatory-organization. In today's installment of yet another rant by BrokeandBroker.com Blog's publisher Bill Singer, we come across one of the few remaining drips and drabs of the last decade's auction rate securities meltdown. By now, the autopsy results have long been known. The auction market locked and froze amid the loss of liquidity. What was sold as "good as cash in the bank" was not. The "never happen" event of no bids happened. Long after the finger pointing ceased, the conclusion was that the blame for customers' losses was on the originators of this flawed product and not the stockbrokers. Faced with those facts, FINRA still requires stockbrokers to run the gauntlet of filing an arbitration Statement of Claim and incurring all the attendant filing fees and litigation costs. ARS expungement arbitration? Why hasn't the ARS expungement application been placed squarely within the regulatory pipeline where it truly belongs? Why isn't FINRA-the-self-regulator reviewing ARS expungement applications on an expedited basis, at no cost to the stockbroker (charge the responsible broker-dealer for all I care)? Why does the concept of "justice" seem so elusive at FINRA when it comes to doing right by the industry's men and women?

Case In Point

In a Financial Industry Regulatory Authority ("FINRA") Arbitration Statement of Claim filed in December 2017, associated person Claimant Collin Andrew Meyer asserted inaccurate reporting on his Central Registration Depository record ("CRD") records. Specifically, Claimant Meyer sought the expungement of three customer complaints (Occurrences 1490060, 1490061, and 1490062), all of which involved investments in auction rate securities ("ARS"). In response to the customers' complaints, Respondent RBC denied the claims; however, the FINRA Arbitration Decision asserts that RBC entered into a settlement with some 2,200 customers pertaining to ARS investments. In addition to seeking an expungement of the cited occurrences, Claimant sought $1 in compensatory damages. In the Matter of the FINRA Arbitration Between Collin Andrew Meyer, Claimant, vs. RBC Capital Markets, LLC, Respondent (FINRA Arbitration 17-03379, September 6, 2018).

Respondent RBC did not object to the expungement relief sought.

SIDE BAR: For background on the RBC ARS settlement:
    • SEC v. RBC Capital Markets Corporation (Complaint, United States District Court for the Southern District of New York, May 26, 2009) 
    • SEC v. RBC Capital Markets Corporation (Consent of RBC, United States District Court for the Southern District of New York, May 14, 2009) 

As set forth in the SEC's 2009 Complaint against RBC under the heading "Nature of the Action":

1. This is a case in which RBC failed properly to disclose in communications with customers the increasing risks associated with auction rate securities ("ARS") that RBC underwrote, marketed and sold. ARS are long-term bonds or preferred stock with interest rates or dividend yields that are periodically reset through auctions that typically, occur on a weekly or monthly basis. A significant portion of RBC's business was underwriting ARS issues and managing ARS auctions as remarketing agent. Through its employees and marketing materials, RBC misrepresented to many of its customers that ARS were safe, highly-liquid investments that were substitutes for cash or money-market funds. As a result, numerous customers invested funds in ARS through RBC that they needed or expected to have available on a short-term basis.

2. Historically, in order to prevent the failure of ARS auctions that RBC managed, RBC routinely invested its own capital to make bids in auctions where there was insufficient demand. During the fall of 2007 and early 2008, deteriorating market conditions and falling customer demand caused RBC, in order to prevent auction failures, to acquire much greater amounts of ARS in the auctions it managed, which in turn caused RBC's proprietary inventory of ARS to increase significantly. Consequently, during this time period, RBC considered declining to place bids for its own account at ARS auctions it managed and knew that the risk of failed auctions had materially increased. Despite RBC being aware of these material facts, RBC did not disclose them to customers. 

3. On February 11, 2008, for the first time in the twelve-year history of its ARS business, RBC declined to place bids in most of the ARS auctions for which it served as remarketing agent and in which the bids of other market participants were insufficient to satisfy all sell orders. At or around the same time, other broker-:dealers also discontinued their practice of placing bids in auctions. As a result, most auctions failed and RBC's customers were left holding billions of dollars worth of illiquid ARS, instead of the liquid short-term investments RBC had represented ARS to be. RBC's individual and non-institutional customers were left holding more than $800 million in illiquid ARS, while its institutional customers held more than $8 billion in illiquid ARS. 

In SEC Finalizes ARS Settlements With Bank of America, RBC, and Deutsche Bank (SEC Release 2009-127 / June 3, 2009) https://www.sec.gov/news/press/2009/2009-127.htm, we are informed that RBC will restore about $800 million in liquidity to its ARS customers and, further, the firm agreed to:

      • purchase ARS at par from its customers even if they moved their accounts; 
      • use its best efforts to provide liquidity solutions for institutional and other customers and will not take advantage of liquidity solutions for its own inventory before making those solutions available to these customers; and 
      • pay eligible customers who sold their ARS below par the difference between par and the sale price of the ARS.
Notice to Customers

Claimant Meyer filed proof of service of his arbitration Statement of Claim upon the customers referenced in the occurrences at issue.  The customer referenced in Occurrence Number 1490060 filed a written response indicating that he did not object to the requested expungment but, beyond that submission, he did not participate in the expungement hearing. None of other the underlying customers submitted a response or participated in the expungement hearing.


The sole FINRA Arbitrator denied Claimant Meyer's request for $1 in compensatory damages but recommended the expungement of the three occurrences from his CRD based upon a FINRA Rule 2080 finding that the claim, allegation, or information is factually impossible or clearly erroneous, and false;and that the registered person was not involved in the alleged investment-related sales practice violation, forgery, theft, misappropriation, or conversion of funds. The Arbitrator provides us with a well-crafted rationale:

The underlying basis for the disputes registered by the customers was that the representation of the underlying investments of all three customers, were liquid and that the customers would be able to liquidate those investments readily if needed. 

The evidence showed that, as a result of unforeseeable market conditions, the investment vehicles involved were, at least temporarily, not readily liquid. This lack of liquidity was unanticipated and contrary to prior history related to these investments. The evidence further demonstrated that most major brokerage firms working with these investments provided settlement funds to their respective customers, who suffered losses. 

In this matter, Respondent provided such settlements to all of its 2200 customers affected by the temporary market illiquidity, including the three customers filing the disputes, so that those customers were fully reimbursed. The evidence was clear that the Claimant in this matter was not involved in that settlement determination or payments in any manner. 

The evidence also demonstrated that all three of the customers were advised that, while these investments would be liquid, there could be no guarantee and that was understood by the customers. Therefore, the claims or allegations of the customers that they were unaware of possible illiquidity issues, were clearly erroneous and false. Additionally, the evidence clearly demonstrated that the Claimant was not involved in any sales practice violations, as demonstrated by the fact that the Claimant made no specific representations to the customers other than providing the public information available regarding investments of the type involved in this matter. 

Finally, even the customers did not hold Claimant responsible for the issues involved here. The evidence clearly reflected that all three of the customers, all of whom were seasoned investors, continued their investment relationship with Claimant well beyond the resolution of this matter. One such investor actually submitted a letter, which is included in evidence, clearly stating that he did not hold Claimant responsible for the conditions that gave rise to the complaint filed.   

Bill Singer's Comment

In this day and age -- in September 2018 -- nearly a decade after the ARS market crashed and burned, and after the SEC twisted the industry's arms and forced the restitution that made most victimized investors whole, it is outrageous that any stockbroker has to go through the asinine process of filing a FINRA arbitration claim seeking to expunge customer ARS complaints. 

If you re-visit the nearly decade-old SEC ARS settlement with RBC, there isn't anything left to the imagination or any substantive issue still open to debate. The ARS market locked up. It was NOT the fault of an individual stockbroker such as Meyer. The fault was in the assumption that ARS was good as cash in the bank and that the auction market would always remain robust and liquid. In the end, no one saw the Great Recession coming -- whether such an economic catastrophe "should have" been anticipated is a whole other issue. That was a painful lesson that some investors survived but many did not. Regardless, Claimant Meyer is blameless in terms of the ARS losses suffered by his clients. Moreover, RBC largely paid restitution to its victimized customers. Gauging from the December 15, 2017, date of Meyer's filed Statement of Claim, it took FINRA some nine months to adjudicate his claim -- which will still require confirmation in a court! Likely, Meyer incurred legal fees and costs. Likely, Meyer incurred the inconvenience of months of dealing with the arbitration process.