Not so much "Know Your Client" as "Ignore Your Client"
Re Matthews 2014 IIROC 56, 2015 IIROC 02
Following a contested hearing on the merits, on January 5, 2015, IIROC fined Grant Patrick Matthews (the "Respondent") $200,000, plus costs of $20,000 and imposed a 5 year prohibition on registration. This was as a result of suitability infractions in respect of 4 clients from January 2009 to May 2012, discretionary trading in respect of 2 of those clients and excessive trading (churning) in respect of 3 of those clients, each over a shorter period.
In its disciplinary decision released December 8, 2014, the Panel set out its view of the "due diligence steps" undertaken by a registrant to "know the client" and "know the product". It held, in part, that once an improper recommendation has been made, it does not matter whether or how the registrant discloses the material negative factors or whether the client claims to understand and accept the risks in the investment. Acknowledgement of the risk does not convert an unsuitable investment into a suitable one.
The Panel found that the Respondent knew his clients' essential facts but ignored them.
All clients in question were (semi) retired.
Fines Imposed for Inappropriate DSC charges
Re Darrigo 2015 IIROC 03
Following an uncontested hearing on the merits, on January 23, 2015, IIROC fined Paul Christopher Darrigo (the "Respondent") $60,000 representing a disgorgement of commissions of $50,000 plus an additional fine of $10,000 due to his improper sales of mutual funds with deferred sales charges.
In a decision released last fall, the Respondent was found to have solicited buys and sells of mutual funds on a deferred sales charge basis to the detriment of his (elderly) clients. He repeatedly sold mutual funds and then repurchased similar funds, subjecting his clients to redemption fees while generating commissions for himself. At times the mutual funds were held for less than a year. These transactions generated in excess of $60,000 in commissions for the Respondent.
The Respondent was also found to have borrowed from 2 clients, which resulted in a fine of $55,000, representing disgorgement of loan proceeds of $45,000, plus an additional fine of $10,000.
The Respondent was fined to 12 months of strict supervision and ordered to pay costs of $65,000.
Unsuitability for Physician of Leveraged ETFs.
Re Milot 2014 IIROC 55
In December 2014, IIROC released a settlement agreement with Paul Milot (the "Respondent"). The settlement arose from one complaint by a 48 year old physician with investment objectives of 60% to 90% growth and 20% high risk. She earned $65,000 to $85,000 per year with net holdings of approximately $220,000. She suffered losses of $92,526, mostly due to the purchase and holding of leveraged ETFs and the decline in a security named Prometic Life Sciences Inc. ("Prometic"). Prometic was a penny stocking comprising approximately 20% of her account.
The Respondent admitted to not understanding how leveraging affects an ETF or that the product was high risk.
Staff and the Respondent accepted the following terms of settlement:
- an aggregate fine in the amount of $20,000;
- six (6) months of close supervision;
- successful completion of the Conduct and Practices Handbook Course within one (1) year following the decision to be rendered in the matter of this settlement agreement;
- costs in the amount of $2,500.
The full text of the settlement agreement can be accessed here.
Revised Sanction Guidelines
IIROC Notice 15-0008
On January 13, 2015 IIROC released its Revised Sanction Guidelines ("Guidelines") effective February 2, 2015. The Guidelines consolidate and replace all previous versions of both the Dealer Member Disciplinary Sanction Guidelines and the UMIR Disciplinary Sanction Guidelines into one set of Guidelines.
In addition to the Guidelines, IIROC published three companion Policy Statements ("Staff Policy Statements") which purport to provide stakeholders with guidance regarding the Staff's approach to the issues of registration suspensions and permanent bars, the consequences of internal discipline by a Dealer Member, and credit for cooperation.
Of note are the summary of public comments and IIROC's responses at Appendix E of IIROC Notice 15-0008 found here some highlights from which are as follows:
- warning letters are not part of a Respondent's disciplinary record. The Guidelines do not intend to broaden the definition of disciplinary record to include warning letters;
- whether a registrant has committed one violation that impacts several different accounts or multiple violations in one account will be considered an aggravating factor;
- suspensions should not be restricted solely to circumstances where there is serious misconduct. IIROC staff does not agree that suspensions are becoming commonplace or imposed in unwarranted circumstances;
- where conduct is egregious, a firm's size should not be an important consideration in serving to reduce a sanction to a point where specific and general deterrence is negatively impacted;
- internally imposed discipline does not necessarily eliminate the need for formal discipline by IIROC.
Announcement of CSA approval and IIROC implementation of 2015 and 2016 IIROC CRM2 Amendments
On January 19, 2015, IIROC announced approval by the CSA of IIROC's 2015 and 2016 CRM2 amendments. The list of amendments begins on page 3 of IIROC Notice No. 15-0013 found here. A summary of the nature and purpose of the amendments begins on page 5 of the same notice.
Release of Annual Consolidated Compliance Report
On January 27, 2015, IIROC released its annual consolidated compliance report. Its contents are highly varied and include discussion of:
- IIROC Priorities for 2015 with respect to Financial, Operational, Trading and Business Conduct Compliance;
- Results of reviews and surveys regarding enhanced suitability;
- 2014 Significant Deficiencies;
A full copy of the IIROC Notice No. 15-0021 is found here.
Guidance on Underwriting Due Diligence
IIROC Notice 14-0299
On December 18, 2014, IIROC published its long anticipated Guidance Respecting Underwriting Due Diligence ("Guidance"). The new Guidance has been in force since its publication.
To the extent that you have not as yet had an opportunity to review, highlights from its Guidance, which is described as neither a minimum nor maximum standard, nor a modification of legal obligations, are set out below. With recognition that not all items may be relevant or appropriate in each case, according to IIROC, each dealer should:
- have written policies and procedures including supervision reflecting what constitutes reasonable due diligence. This is a contextual determination for each underwriting and the result of the exercise of professional judgment;
- have a due diligence plan that reflects the context of the offering and the level of due diligence that is reasonable to the circumstances;
- hold due diligence Q&A sessions at appropriate points during the offering process as an opportunity for syndicate members to ask detailed questions of the issuer's management, auditors and counsel;
- perform sufficient business due diligence to understand the business of the issuer. Professional judgement is to be exercised in determining what material facts should be independently verified. Examples of 'red flags" about an issuer are provided in the Guidance;
- understand the boundary between business and legal due diligence. Matters to be reviewed by underwriters are not to be delegated to counsel, who should be supervised;
- appreciate that the extent of reliance on experts and other third parties is a contextual determination;
- not unduly rely on the lead underwriter. Each syndicate member should satisfy itself that the lead underwriter performed the kind of due diligence the syndicate member would have performed on its own behalf;
- document the due diligence process to demonstrate compliance;
- ensure, through effective supervision and compliance, that its execution of the prospectus certificate signifies that the dealer has participated in the due diligence through appropriate personnel and process.
Some further details are provided in respect of each of the very general guiding principles described above. Summary of common practices and suggestions are found at Appendix A and matters to be considered in creating a due diligence plan are found at Appendix B.
The full text of the Guidance can be accessed here.
MFDA ENFORCEMENT PROCEEDINGS
Settlement Agreements Regarding Unsuitable Leveraged Investment Strategies:
Re Lloyd A. Snyder, File No. 201330
On December 8, 2014, the MFDA released notice of its approval of a settlement agreement in circumstances where Lloyd Snyder (the "Respondent") admitted that he failed to ensure that the leveraged investment recommendations that he implemented in the accounts of at least 15 clients were suitable. The time period in question spanned 2003 through to early 2009. The leveraged investment strategies were the "Smith-Snyder Manoeuver"; and the "Forced Savings Program". These strategies involved clients borrowing monies to purchase return of capital mutual funds structured to pay monthly proceeds to investors, which proceeds declined due to market conditions. They were therefore insufficient to allow the strategies to perform in a manner the Respondent had represented to clients they would.
The Respondent was subject to a 10 year prohibition from conducting securities related business, a fine of $50,000 and costs in the amount of $50,000. In the event that the Respondent did not pay the fine or the costs, he would be subject to permanent ban without further notice.
A full text of the settlement agreement can be read here.
Settlement Agreements Regarding Falsifying Documents
Know Your Client Forms
Re Donald Cameron Welsh, File No. 201366
On December 8, 2014, the MFDA released notice of its approval of a settlement agreement in circumstances where Donald Cameron Welsh (the "Respondent") admitted that he falsified the initials of 12 clients on a total of 12 Know Your Client Forms and made changes to the forms, contrary to MFDA Rule 2.1.1. The time period in question spanned December 2009 to November 2012. The Respondent paid approximately $15,000.00 to the Member to compensate them for the additional supervision he required after the matter was discovered.
The Respondent was subject to a fine in the amount of $7,500 and costs of $2,500.
A full text of the settlement agreement can be read here.
Re Lachman Hassaram Balani, File No. 201402
On January 15, 2015, the MFDA released notice of its approval of a settlement agreement in circumstances where Lachman Hassaram Balani (the "Respondent") admitted that, between March 2010 and February 2013, he obtained and maintained approximately 89 account and trade forms in 23 client accounts which were signed by clients when the forms were blank or only partially complete, and used the forms to process transactions in client accounts, contrary to MFDA Rule 2.1.1.
The Respondent was subject to a fine in the amount of $10,000 and costs in the amount of $2,500 in accordance with a timeline, which, if breached, would result in immediate suspension until such time as the amounts are paid.
Documents produced to Regulator Pursuant to Statutory Assurances of Confidentiality ordered Producible in Litigation:
Société financière Manuvie c. D'Alessandro, 2014 QCCA 2332
In a decision released on December 19, 2014, the Québec Court of Appeal ("Court") affirmed a lower Court's decision requiring, the appellant to produce in a class action, confidential documents that it had exchanged with the Office of the Superintendent of Financial Institutions ("OFSI") pursuant to the Supervisory Information (Insurance Companies) Regulations (SOR/2001-56) ("Supervisory Regulations") despite strict statutory prohibitions on disclosure.
The Court held that while the Supervisory Regulations were enacted to limit the communication of information provided to OFSI pursuant to its provisions, they did not amount to an absolute prohibition on disclosure in litigation. The documents were found to be relevant and producible. The Court did however state that a confidentiality agreement between the parties could prevent confidential documents from being viewed by the wider public.
These findings may have a direct impact on how confidential documents provided to regulators at large are treated in the context of litigation.
A copy of the original French decision can be found here.
Directors & Officers: Shareholders Remain Restricted in Breach of Fiduciary Duty Claims
Shon v. Argo Mezzanine Financing No.3 Ltd., 2014 BCSC 2117
This decision confirms that, contrary to the rule in certain U.S. jurisdictions, shareholders will only rarely be able to make a fiduciary breach claim directly against an officer or director of a corporation. To do so, they must establish not only an independent relationship with the defendant but also a loss that was separate from any loss suffered by the corporation (and hence all other shareholders). Shareholders may, however, be able to bring oppression actions against specific directors for unfairly prejudicing their interests. (The plaintiff did not appear to do so in this case, for reasons that are not immediately apparent.)
The plaintiff, Ms. Shon, invested $0.5 million in a real estate project in Vancouver. Mr. Hong solicited investment in respect of this project, and was president of Argo Mezzanine Financing No. 3 Ltd. ("Argo No. 3"), a privately held company, and the entity holding the interest in the underlying lands on which the project would be located.
According to Ms. Shon, Mr. Hong caused a mortgage of the underlying lands to be granted to a related entity and then falsely represented to the Argo No. 3 investors that the project would fail if they did not return their shares and provide further investment funds to Mr. Hong. Ms. Shon brought a claim against Mr. Hong alleging, among other things, negligent misrepresentation. Directors generally owe a duty of care to the corporation, not directly to individual shareholders (who may instead bring an oppression action against a director that disregards their interests).
The Court affirmed that, in certain circumstances and particularly in closely-held corporations, directors may owe fiduciary duties directly to shareholders. In order for a shareholder to make out such a claim, he or she must establish that the director had a relationship with the shareholder that was independent of the director's duties to the corporation; the loss suffered must similarly be independent of any losses suffered by the corporation.
The Court found that the losses claimed were suffered by all shareholders of Argo No. 3, and not simply Ms. Shon. As a result, Ms. Shon could not claim any losses that were independent of the losses of Argo No. 3.
A full text of the decision can be found here.
Providing Alberta Securities Commission Investigation Materials SEC does not violate the Charter
Beaudette v. Alberta Securities Commission, 2015 ABQB 57
On January 22, 2015, the Alberta Court of Queen's Bench determined in Beaudette v Alberta (Securities Commission), 2015 ABQB 57, that providing information gathered by the Alberta Securities Commission ("ASC") during the course of their investigation to foreign agencies does not violate the Canadian Charter of Rights and Freedoms (the "Charter").
A key fact in this case is that Beaudette had yet to be charged with an offence, and even if he was to be charged, no threat of serious harm to Beaudette (i.e. through the use of the death penalty in the U.S.) would be imminent. The Court in this case did suggest that its analysis may be different if the potential harm to the applicant may have been greater.
The applicant in this matter, Scott Beaudette, was served with a summons from the ASC requiring him to produce materials and attend an interview as part of an ongoing ASC investigation. Mr. Beaudette refused to attend the interview based on his belief that the materials he was required to provide and the interview transcript would be provided to the United States Securities and Exchange Commission ("SEC"), who could then possibly forward those materials on to the U.S. Department of Justice, who could potentially pursue criminal charges against him using the investigation materials as evidence.
The Court concluded that, while there was at least some possibility that Mr. Beaudette could be prosecuted in the U.S., what evidence may be used against him in those proceedings is strictly a matter of American criminal procedure, and within the exclusive authority of that country.
In relying on principles set down by the Supreme Court of Canada in previous decisions, the Court determined that it must strike a balance between an individual's right to privacy and the state's legitimate interest in obtaining and sharing information, and the particular fact that in securities regulation, the reasonable expectation to privacy in such a heavily regulated industry is low.
A full text of the decision can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.