On May 11, the Investment Industry Regulatory Organization of Canada (IIROC) published its 2019 Enforcement Report (Report). Although the Report will be of greatest interest to IIROC members, we think that other registered firms will find certain parts of the Report relevant. We have summarized below some of the Report’s enforcement case studies, which highlight some areas of continuing concern for regulators.
- Unauthorized Discretionary Trading: A father and son team at BMO Nesbitt Burns executed at least 7,000 discretionary trades in approximately 100 client accounts, even though the father did not have IIROC’s approval to manage discretionary accounts and BMO had not authorized any of the accounts for discretionary trading. The duo also took steps to prevent the Compliance Department from spotting the unauthorized activity. The settlement provided for, among other things, fines ($40,000 and $30,000, respectively), prohibition of approval (30 months and 16 months, respectively), close supervision (12 months and 6 months, respectively), and costs of $2,500 each.
- Facilitated Suspicious Trading: Two advisors at Hampton Securities facilitated suspicious trading by a group of related accounts and insiders of two TSXV-listed issuers. The advisors received unsolicited orders either from an insider or family member of the issuers, with frequent deposits of large quantities of securities certificates of the two issuers followed by asubsequent sale. The related clients engaged in frequent same-day trading (including trading on opposite sides of the market), which sometimes resulted in no economic benefit. According to IIROC, numerous red flags generated by the trading should have caused the advisors to question the trading or request explanations from their clients about the trades’ legitimacy. As a result, they breached their gatekeeper responsibilities. The settlement provided for, among other things, fines ($50,000 and $20,000, respectively) and costs of $7,500 each.
- Non-Disclosure to Firm of Profit-Sharing and Loan Arrangement with Client: A representative (R) arranged with one of the firm’s clients to loan him $3 million so that he could participate in a bought deal involving his firm. The loan provided for profit-sharing on the transaction. When R’s supervisor questioned him about the source of $3 million, he stated that the funds were a loan collateralized against his condo and didn’t disclose the lender’s identity or the profit-sharing arrangement. In the disciplinary hearing, the panel found that the profit-sharing and loan arrangement created an actual or potential conflict of interest between the client and R and between the client and the firm, that R’s statements to his supervisor were false and misleading, and that failing “to provide true and complete disclosure prevents a firm from being able to fulfil its obligations to respond to existing or potential conflicts of interest.” The Ontario Securities Commission (OSC) dismissed R’s appeal of IIROC’s decision and the sanctions (including a fine of $30,000, disgorgement of approximately $25,000, costs of $24,500, and suspension of approval for two years).
- Is It or Isn’t It an OBA? A representative (T) provided funds to acquire an interest in a trust, which acquired the sole interest in a limited partnership (LP), which then used the funds to acquire interests in oil and gas wells. Revenue from the well was eventually distributed up through this structure to T and other investors. The hearing panel also found that he had misled Enforcement Staff regarding his interest, and a family member’s interest, in the vehicle. During the initial disciplinary hearing, the panel concluded that T did not engage in an unauthorized outside business activity (OBA) because it viewed his involvement as a passive investment. On appeal, however, the British Columbia Securities Commission (BCSC) disagreed with the IIROC hearing panel’s interpretation of the law and held that it wasn’t necessary to find that T managed the OBA in order to find a breach of IIROC’s rules. When the matter was referred back to the IIROC hearing panel, it concluded that the activity was not disclosed to or approved by T’s firm. He was fined $75,000, required to disgorge over $100,000 and pay costs of $80,000. He also had his approval suspended for twelve months and made subject to close supervision for six months upon his re-instatement.
Enforcement case studies like these can serve as a training tool to help compliance and supervisory staff spot red flags and raise awareness among all employees of how the law is interpreted. AUM Law can provide compliance training (including virtual sessions) tailored to your business operations and compliance risk areas. Please contact us find out how we can help.
May 29, 2020