An Ontario Securities Commission (OSC) hearing panel has approved a settlement with Toronto-based Royal Mutual Funds Inc., in which the mutual fund dealer will pay more than $1 million to settle allegations that it contravened the mutual fund sales practices rule by paying reps higher commissions to sell its proprietary funds, the OSC announced on Wednesday.
The panel reprimanded Royal, and ordered the firm to pay a $1.1 million administrative penalty and $20,000 in costs.
According to the settlement agreement, Royal paid reps 10 basis points more for selling its proprietary funds of funds, known as the RBC Portfolio Solutions funds (RBC PS), than it paid reps for selling other in-house and third-party funds.
Between 2011 and 2016, Royal reps received more than $24.5 million in additional commissions — approximately $5,500 per rep per year — due to the higher commissions Royal paid them for selling the RBC PS funds.
The practice was uncovered in a review of fund dealer compensation practices that was carried out jointly by the OSC and the Mutual Fund Dealers Association of Canada (MFDA) in 2016. As a result, Royal stopped paying the higher commissions that same year.
The higher commissions violated the mutual fund sales practices rule, which aims to regulate the sorts of incentives firms can provide reps to sell certain funds. Among other things, it restricts firms from paying incentives that favour in-house funds.
The proposed penalty “falls within an acceptable range” based on the duration of the misconduct, the amount of added commissions paid to reps, and the mitigating factors in the case, the panel stated in its oral reasons for approval.
A “significant mitigating factor” in the case was that the added commission favoured the RBC PS funds over both third-party funds and other RBC funds.
“This provides evidence that the intention of enhanced compensation was not predatory toward the third-party funds, but rather an incentive to recommend the RBC PS funds,” the panel stated.
Royal Mutual Funds is wholly owned by Toronto-based Royal Bank of Canada.