Royal Bank of Canada, as part of a settlement with the United States Securities and Exchange Commission, New York Attorney General’s office, and the North American Securities Administrators Association, will offer to purchase, at par, auction rate securities held by its US retail brokerage clients, defined as all individual investors, charities with accounts at RBC of US$25 million or less, as well as small institutions and businesses with accounts at RBC of US$10 million or less. The repurchase offer is being extended to approximately 2,200 clients, in the wealth management and capital markets divisions of RBC Capital Markets Corporation, as well as from JB Hanauer & Co. and Ferris, Baker Watts, Inc., two firms recently acquired by RBC.
The specific elements of the settlement agreements are as follows:
Repurchase Offer
•No later than 15 December 2008, and for a period of six months, RBC will offer to purchase at par non-performing auction rate securities from all individual investors, charities with accounts at RBC of US$25 million or less, and small institutions and businesses with accounts at RBC of US$10 million or less who purchased the securities from or through RBC prior to 11 February 2008.•The offer will apply to all auction rate securities for which auctions are not operating at the time of the offer.•Qualifying clients who sold eligible auction rate securities below par between 11 February 2008 and the settlement date will be paid the difference between par and the price of the sale.
Other Key Terms
•RBC will continue its program to extend to retail clients, at their request, loans for the purposes of liquidity of up to the full par amount of the investor’s eligible auction rate securities, for the period up to the commencement of RBC’s repurchase offer, at no net interest cost to the investor.•RBC will continue to work with issuers and other interested parties to provide liquidity applications for institutional investors not covered by the repurchase offer.•RBC will participate in a special arbitration process overseen by the Financial Industry Regulatory Authority (FINRA) through which any retail client who purchased auction rate securities from RBC will be able to make claims for consequential damages.
The repurchase offer represents approximately US$850 million of auction rate securities, of which more than 85% are AAA-rated. Of this dollar amount, more than 70% are auction rate preferred securities for which other broker dealers were lead underwriters and auction agents.
The impact of the repurchase offer to RBC’s fourth quarter 2008 results is currently estimated to be approximately US$30 million on a pre-tax basis. This is based on the estimated difference between par value and current valuations and a penalty of US$9.8 million RBC has agreed to pay to the New York Attorney General’s office and the state securities commissioners associated with the North American Securities Administrators Association. RBC neither admits nor denies allegations of wrongdoing. The actual financial impact to RBC of the repurchase offer will depend on the number of clients who accept the repurchase offer, and market conditions at the time they accept.
D.C.