On May 19, 2020, securities regulators of the Massachusetts Securities Division (Division) filed an administrative complaint (Complaint) against RBC Capital Markets, LLC and one of its veteran stockbrokers. The Complaint concerned allegations that a long-time RBC broker heavily recommended, and in some instances purportedly overconcentrated customer accounts in a certain type of investment known as a Master Limited Partnership (MLP).

MLPs are a unique investment vehicle that combines the liquidity of publicly traded common stock with some of the tax advantages (and disadvantages) of a partnership structure. Many MLPs operate in the energy sector and are tied to the performance of an underlying commodity, whether it be crude oil, natural gas, or natural gas byproducts. In particular, MLPs which undertake costly and risky exploration and production (E&P) business activities can be susceptible to commodity volatility, and therefore in some instances, cause significant losses for investors during periods of collapsing energy market prices.

As alleged in the Complaint, over the course of the past decade, RBC’s broker had adopted a “one-size-fits-all investment strategy which ignored RBC’s internal compliance procedures” while RBC “similarly failed to address” its broker’s actions. Specifically, Massachusetts regulators have alleged that RBC failed to properly flag their broker’s concentration of some customer accounts into approximately 50% or more exposure to energy sector MLPs and related securities. This level of exposure reportedly ran afoul of RBC’s own internal policies which did not allow for more than 30% of a customer’s account to be concentrated in a single sector. In total, the broker allegedly recommended the purchase of some $30 million worth of MLPs between 2013 and 2017.

When a financial advisor recommends an investment to a customer, he or she must first conduct due diligence on that investment. Further, the broker must conduct an adequate suitability analysis in order to determine if that investment is suitable given the customer’s stated investment objectives and associated criteria, including the investor’s age, net worth and income, liquidity needs and time horizon, risk tolerance, and prior experience with investing. Moreover, the brokerage firm has a legal obligation to adequately supervise its brokers, including monitoring customer accounts for potential red flags, such as possible investment overconcentration, and where appropriate, enforcing its own internal policies and procedures governing broker activity and conduct.

In recent years, many retail investors have been solicited to invest in MLPs due to their characteristic yield. Unfortunately, in some cases, investors may not have been adequately informed of the risky nature of MLPs, in particular those operating in the upstream of the energy sector which entails costly and risky E&P business activities. Additional risks and complexities associated with investing in MLPs include their partnership structure and conflicts of interest inherent in the relationship between the General Partner (charged with managing the MLP), and Limited Partners (the investors).

Financial advisors and brokerage firms who have solicited their clients into investing in certain energy sector investments, including MLPs and more complex and esoteric oil and gas drilling funds and direct participation programs, may be liable for investment losses suffered, particularly when a customer’s account has become overconcentrated in volatile energy sector investments. Investors may pursue a claim to recover monies through securities arbitration before FINRA, or in some instances, through litigation. Investors who wish to discuss a possible claim are invited to contact us by telephone at (201) 771-1115 or by email at info@gialawgroup.com for a no-cost, confidential consultation.