Royal Mutual Funds Inc. has agreed to pay more than $1-million in fines after investment regulators found the mutual-fund company was offering higher commissions to Royal advisers to sell its own proprietary funds.
In a settlement agreement this week, Royal Mutual Funds – a fund dealer that is wholly owned by Royal Bank of Canada – agreed to pay a $1.1-million administrative penalty and $20,000 in costs to the Ontario Securities Commission after the regulator voiced concerns surrounding its mutual-fund sales practices.
Last week, the OSC alleged that during November, 2011, to October, 2016, the fund dealer contravened regulatory rules by offering and paying representatives 10 basis points more in commissions for the sale of units in its RBC Portfolio Solutions funds than for the sale of units of third-party funds.
As per regulatory rules, a principal distributor of a mutual fund that is also a participating dealer of another mutual fund is prohibited from providing incentives to any of its reps to recommend a mutual fund of which it is a principal distributor over a mutual fund of which it is a participating dealer.
According to Royal Mutual Funds, in the settlement agreement, the enhanced compensation was intended to encourage in-house representatives to recommend the RBC funds when consistent with client’s investment goals, not to discourage investments in third-party funds, which account for a small proportion of Royal Mutual’s gross sales.
The enhanced compensation totalled more than $24.5-million in additional payments being paid out to reps over the five-year period – on average, between $4,848 and $6,282 a rep. (The enhanced compensation did not have any bearing on the fees charged to clients who purchased the funds.)
The OSC, along with the Mutual Fund Dealers Association of Canada, became aware of the payments during a 2016 targeted review of MFDA members’ compensation and incentive programs, at which time Royal Mutual Funds ended the enhanced compensation for proprietary funds.
The OSC stated in the settlement that it found that the increase in compensation had no bearing on fees charged to clients for any of the funds, and there was no harm to clients as a result of investments in the proprietary funds.
As a result of the settlement, Royal Mutual Funds has also engaged in an extensive review and testing of its systems of control and supervision, and developed enhanced procedures designed to ensure regulatory requirements were being met.
Clare O’Hara