When downtown L.A.’s City National Bank agreed to merge with Toronto’s Royal Bank of Canada, City National Chief Executive Russell Goldsmith said the deal would let his bank do more for its customers by leveraging RBC’s much bigger balance sheet.

But regulators are looking into an allegation that the banks are already working together, even though the deal has yet to be approved – and that’s against the rules.

A June 29 letter from Carol Evans, an assistant director of the Division of Consumer and Community Affairs at the Federal Reserve, asked City National and RBC to respond to an allegation made by an unidentified person who said that the two banks had conspired to jointly extend credit to a City National customer.

Evans asked City National to respond directly to that accusation as well as shed light on any other collaboration or plans to collaborate that the two banks might have had.

A City National spokeswoman said the bank does not comment on its communications with regulators.

Though it’s a single allegation from an unnamed accuser, it could prove to be an unwanted wrinkle in a merger that observers expected would proceed without a hitch. The banks have already gone out of their way to work with community groups that have been effective in holding up other bank deals, most notably the proposed sale of Pasadena’s OneWest Bank to Livingston, N.J., lending firm CIT Group Inc.

City National, L.A.’s largest bank, has about $32 billion in assets. RBC has nearly $800 billion on its balance sheet.

“Some of our most successful clients need capital markets or have bigger borrowing needs than we could do prudently,” Goldsmith told the Business Journal earlier this year. “This is going to create more capacity for us to do things.”

Puerto Pobre

While much of the world has been focused on the Greek saga, there’s another heavily indebted tourist destination – one much closer to home – causing concern for American fund managers: Puerto Rico.

Drew Zager, a managing director at Morgan Stanley Private Wealth Management in Century City, has been sounding the alarms on Puerto Rico for a while now.

Zager recently told the Business Journal that the fundamental weaknesses of Puerto Rico’s economy – such as its high youth unemployment, shrinking population and massive debt load that’s equal to 95 percent of its gross domestic product – are why he continues to have a negative outlook on the island’s debt.

Puerto Rican debt is exempt from federal, state and local tax to U.S. investors regardless of where they live, unlike state municipal bonds, which are tax exempt only to residents of their respective states. That made Puerto Rican bonds popular with mutual funds.

But in a recent note, Zager pointed out that mutual funds have pared down to hold only 41 percent of the island’s debt, while nontraditional and more opportunistic investors such as hedge funds, which are more likely to ride things out, have bought more.

You can find both Puerto Rico bulls and bears in Los Angeles.

Billionaire bond king Jeffrey Gundlach, chief executive of downtown L.A.’s DoubleLine Capital, said during a May investor call that he believes Puerto Rico debt is underpriced and that creditors who invest now are likely to be paid back at par. DoubleLine holds some Puerto Rico general obligation bonds in its DoubleLine Income Solutions closed-end fund, and Gundlach said he has purchased some for his personal account as well.

Downtown L.A. mutual fund giant Capital Group, however, is choosing not to ride the wave. The money manager dumped all of its Puerto Rico general obligation bonds, according to a March 31 filing.

Alternative Fund

Hedge funds tend to be off limits to average investors, but downtown L.A. money manager TCW Group is bringing a popular strategy used by many of those funds to the mainstream. Last week, the firm announced a new mutual fund, the TCW Gargoyle Hedged Value Fund, that’s designed to work like a long-short hedge fund.

The fund is a partnership between TCW and Gargoyle Investment Advisor in Englewood, N.J. It will buy stocks the management team believes are undervalued while selling options they feel are overpriced.

C-suite News

Xceed Financial Credit Union in El Segundo has promoted Ray Shams to executive vice president and chief operating officer and Bertha Gascon to senior vice president of lending. … City National Bank has hired a commercial banking team and opened an office in Roseville, a Sacramento suburb. The office will be headed by Dan Guth. … New York broker-dealer Bonwick Capital Partners has named Rashaun Williams head of corporate finance. Williams, who was formerly a partner at QueensBridge Venture Partners – rapper Nas’ VC firm – will run Bonwick’s new L.A. office. … Greysteel, a Bethesda, Md., investment firm, has opened a West Hollywood office, its first in the L.A. area. Managing Director Joshua Ross will head the new outpost. … Downtown L.A. lender and factoring firm Hana Financial has named Albert D. Perez chief risk officer. He was previously with BBVA Compass Bank.

Staff reporter Matt Pressberg can be reached at mpressberg@labusinessjournal.com or (323) 549-5225, ext. 230.

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