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U.S. Securities and Exchange Commission

SEC Division of Enforcement Announces ARS Settlement in Principle With RBC Capital Markets Corp.


Washington, D.C., Oct. 8, 2008 — The Securities and Exchange Commission's Division of Enforcement today announced a preliminary settlement in principle with RBC Capital Markets Corp. (RBC) that would provide individual investors, small businesses, small nonprofits, charities and religious organizations the opportunity to sell back to RBC all of the auction rate securities (ARS) they purchased from RBC before the ARS market collapsed in February 2008.

The Division of Enforcement expects this settlement in principle to provide liquidity of up to $800 million to more than 2,000 aggrieved investors. The agreement in principle also would require RBC to use its best efforts to provide liquidity to other larger ARS investors. The terms of the settlement are subject to finalization, review, and approval by the Commission.

"The Division of Enforcement's settlement in principle with RBC will quickly restore liquidity to those individual, charitable, and small business investors who can least afford to have their funds unavailable in the short term," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "Soon, these investors will have restored to them the liquidity they thought they were getting when they invested in the ARS market. Under the settlement in principle, pending Commission approval, RBC also must use its best efforts to restore liquidity to ARS holdings of institutional investors."

The proposed settlement would include charges in U.S. District Court alleging that RBC made misrepresentations to its customers when it told them that ARS were safe and highly liquid cash equivalent and money market alternative investments. The liquidity of these securities, however, was premised on RBC providing support bids for auctions when there was not enough customer demand, and RBC did not adequately disclose the extent of this support to customers. RBC continued to market ARS this way despite its awareness of the escalating liquidity risks in the weeks and months preceding the collapse of the ARS market in February 2008. When RBC stopped supporting auctions in February 2008, there were widespread auction failures for RBC customers.

Under the terms of the agreement in principle:

  • No later than Dec. 15, 2008, RBC will offer to purchase, at par, all ARS from individual investors, small business investors with account values up to and including $10 million, and investors that are nonprofit, charitable or religious organizations with account values up to and including $25 million, that purchased ARS from RBC prior to the collapse of RBC's ARS market on Feb. 11, 2008, and for which ARS the auctions are not successful (Individual Investors). RBC's purchase offer will remain open for at least six months.

  • By Dec. 15, 2008, RBC will make whole any losses sustained by any Individual Investors described above who purchased eligible ARS before Feb. 11, 2008, and sold them after that date at a price below par.

  • Until RBC actually purchases the securities as set forth above, RBC will offer Individual Investors non-recourse loans at no net cost to the borrower, which loans will remain outstanding until RBC purchases the ARS or until an investor declines RBC's purchase offer.

  • To the extent that any of the Individual Investors described above have incurred consequential damages beyond the loss of liquidity in their ARS holdings (which should be restored pursuant to the purchase terms above), RBC will participate in a special arbitration process that the investor may elect, and that will be overseen by the Financial Industry Regulatory Authority (FINRA), whereby RBC will not contest liability related to the misrepresentations and omissions concerning the sale or liquidity of the underlying ARS, but may challenge the existence or amount of any consequential damages. At the investor's election, the arbitration claim may be heard by a single, non-industry arbitrator.

  • This arbitration process will be voluntary on the part of the ARS investor, and if investors elect not to take advantage of these special procedures, they may pursue all other legal or equitable remedies available through any other available administrative or judicial process.

  • RBC will use its best efforts to provide liquidity by the end of 2009 to its institutional and business ARS investors with accounts valued at more than $10 million, and investors that are nonprofit, charitable and religious organizations with accounts valued at more than $25 million that purchased ARS from RBC prior to the collapse of RBC's ARS market on Feb. 11, 2008, and for which ARS the auctions are not successful (Institutional Investors).

  • RBC will not liquidate its own inventory of a particular ARS at par before offering to liquidate an Institutional Investor's holdings in that security. Otherwise, RBC will not liquidate its own inventory of a particular ARS at any price below par before offering to liquidate the same ARS holding of an Institutional Investor that has informed RBC of its intention or willingness to sell that security at such price or better.

  • RBC will provide notice of the settlement terms to all investors who purchased ARS from RBC before Feb. 11, 2008.

  • RBC will establish a toll-free telephone assistance line, with appropriate staffing, to respond to questions from investors concerning the terms of the settlement.

  • RBC will be permanently enjoined from violating the provisions of Section 15(c) of the Securities Exchange Act of 1934, which prohibits the use of manipulative or deceptive devices by broker-dealers.

  • RBC will cooperate with the Commission's ongoing ARS investigation.

  • RBC faces the prospect of a financial penalty to the Commission after it has completed its obligations under the agreement in principle. Determinations as to the amount of the penalty, if any, will take into account, among other things, the extent of RBC's misconduct in marketing and selling ARS, the extent of RBC's cooperation with the Commission's investigation, an assessment of whether RBC has satisfactorily completed its obligations under the settlement, and the costs incurred by RBC in meeting those obligations, including penalties imposed by other regulators and the cost of remediation.

The Commission notes the substantial assistance and cooperation of the New York Attorney General's Office, the North American Securities Administrators Association, and FINRA.

The Commission's investigation is continuing as to individuals and other entities that participate in the auction rate securities market.

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For more information, contact:

Fredric D. Firestone
Associate Director, Division of Enforcement
(202) 551-4711

Gregory G. Faragasso
Assistant Director, Division of Enforcement
(202) 551-4734



Modified: 10/08/2008