OSC Released Draft Statement of Priorities
On April 2, 2016 the OSC issued Notice 11-771, Draft Statement of Priorities for the Financial Year to End March 31, 2016. Comments are due by June 1, 2015. Challenges and issues noted by the OSC include:
- Demographics, including a growing seniors population which generate investor focused issues;
- A recognition that:
- Reliance on advice is expected to grow to meet changing investor profiles which includes a shift from defined benefit to defined contribution pension plans. Issues related to market conduct, firm compliance cultures and how advisors meet the interests of their client are areas of focus;
- A well-functioning investor/advisor relationship is critical, which includes improving the standards of financial advice, raising competency and increasing transparency regarding financial advice;
- An increasing regulatory burden affects the competitiveness of Ontario capital market;
- Investor protection is listed as the OSC's first goal, which includes reference to Know Your Client, Know Your Product and suitability obligations. It also includes reference to an investor's need to better understand the cost of advice and be assured the compensation structure does not adversely affect the quality of advice.
In addition to aging demographics, other vulnerable investor groups are described as including those who are seeking to support education costs for children or meet lifestyle consumption goals.
Other goals include the promotion of women on boards and in executive and senior management position, effective compliance supervision and enforcement through various measures which include enhanced enforcement and adjudicative processes, and the promotion of financial stability which includes the regulation of the fixed income market.
A full copy of the Draft Statement of Priorities is found here.
IIROC Releases Enforcement Report
IIROC released its 2014 Enforcement Report. The greatest number of regulatory violations prosecuted by IIROC remains violations in respect of due diligence/handling of client accounts/suitability. A full copy of the Enforcement Report may be found here.
Highlights From Other IIROC Enforcement Proceedings
Chief Compliance Officer's Failure to Supervise – Re Menzel
By way of settlement agreement, an Ultimate Designated Person, Chief Compliance Officer and a Supervisor agreed to a fine of $20,000, a six-week suspension from registration as a Supervisor, and costs in the amount of $1,500 for failing to supervise a registered representative between January 2010 and January 2012. The registered representative had been previously fined $36,000 and suspended from registration for 6 months.
The matter concerned the registered representative opening of accounts in connection to the purchase of shares in MobileBits Holdings Corp. ("MBIT"), an OTCC Stock. MBIT shares were not legally qualified for distribution in Ontario and Québec, where clients were located. The registered representative was found to have failed to exercise due diligence when opening these accounts.
The CCO/UDP admitted to numerous allegations of inadequate supervision of the registered representative. Specifically, these included failing to make sufficient inquiries into the registered representative's actions in relation to purchases of MBIT shares by his clients, and failing to review documentation concerning MBIT that had been provided by him.
IIROC took issue with the fact that the registered representative was allowed to work from a home office, from the offices of another company, and out of the country. The CCO/UDP admitted to never having inspected the home or other office. In addition, he admitted that allowing the registered representative to use an email address that was unaffiliated with the dealer prevented adequate supervision.
The full text of the reasons can be accessed here.
Non-Disclosure of Off-Shore Accounts – Re Kotar
By way of a settlement agreement, a registered representative admitted to maintaining an off-shore brokerage account (in Panama) without the knowledge and consent of his employer. The BC Securities Commission learned of the account during an informal meeting in respect of an investigation it was conducting into "foreign accounts generally". The Respondent was not registered at the time of the settlement agreement. He agreed to a $20,000 fine, $2,500 in costs and a rewrite of the CPH.
The CSA, IIROC and the MFDA have formed a joint Regulators Committee (JRC) in respect of the OBSI. The JRC released its first annual report which included an overview of the JRC's activities. According to the report, the JRC monitors compensation refusals and considers patterns or issues raised by them. It is also in the process of establishing a protocol to define potential "systemic cases" and to set out a regulatory approach to address these cases when reported by the OBSI. For the CSA Staff Notice, please click here.
MFDA Enforcement Proceedings
MFDA Imposes Series of Sanctions For Blank, Pre-Signed Forms and Unsuitable Leveraging
The MFDA has engaged in a series of enforcement proceedings regarding both blank pre-signed forms and unsuitable leveraged investment strategies.
Blank Pre-signed Forms:
Agreed to a fine of $5,000 and costs of $2,500 for obtaining, maintaining and sometimes using 21 blank, pre-signed trade forms in respect of 16 clients. A copy of the Reasons for Decision is found here.
Agreed to a fine of $10,000, costs of $2,500 and probation from
acting in a compliance or supervisory capacity for 6 months for
using 74 blank pre-signed account forms or photocopies of partially
complete pre-signed account
forms which he altered after clients had signed the forms in respect of 30 client accounts. A copy of the Settlement Agreement is found here.
Agreed to a fine of $7,500 and costs of $2,500 for maintaining 72 pre-signed and/or altered photocopied account forms for 13 clients. A copy of the Reasons for Decision is found here.
William Morris Adams
Agreed to costs of $7,500 and completion of an "industry compliance course acceptable to the MFDA" within 6 months of the Settlement Agreement for signing new account applications and for obtaining blank pre-signed new account opening forms and investment loan application forms for at least 13 clients which he forwarded to a third party to complete. A copy of the Reasons for Decision and Settlement Agreement may be found here.
Unsuitable Leveraged Investment Strategies
Following a hearing on the merits and an agreed statement of facts, the Respondent was fined $25,000, ordered to pay costs of $7,500 and subject to a 5 year prohibition from conducting securities related business for failing to explain the risks, costs and ensure the suitability of a leveraged investment strategy for 9 clients. A copy of the Reasons for Decision is found here.
Directors' and Officers' Liability
Director personally liable for failing to return investment funds in a business
A director was ultimately found to be personally liable for a breach of contract by a corporation. The corporate veil was lifted solely on the basis that the director instructed the corporation to breach the contract, without expressly finding any fraud, misappropriation or breach of fiduciary duty.
The Alberta Court of Queen's Bench refused to find that certain funds were held in trust, finding that the parties had failed to set out a trust in writing or otherwise manifest any intent to create a trust. Rather, the parties entered into a contract where a director promised to deliver shares (when issued) in exchange for the invested funds. No fiduciary relationship arose.
The Court found that the corporation and the director were liable for unjust enrichment. The director was personally liable for the unjust enrichment because he was the controlling mind of the corporation. According to the Court, following the Ontario Court of Appeal's decision in Shoppers Drug Mart Inc. v. 6470360 Canada Inc. (Energyshop Consulting Inc./Powerhouse Energy Management Inc.), 2014 ONCA 85, he directed that a wrongful thing be done, by improperly refusing to return the funds when asked.
Securities Class Actions: a need to prove reliance on a uniform misrepresentation does not necessarily bar certification
An offering was made of the Can-Am Fund, an investment fund related to several different insurance contracts that was similar to a mutual fund. The Defendant represented in its disclosure documents that the fund would use "best efforts" to replicate the performance of the S&P 500 Total Return Index. Investors brought a class action alleging, among other things, that this claim amounted to a negligent misrepresentation.
The Court declined to certify the class action, finding that a class action was not the preferable procedure to advance the class claims. It was held that the class members had individual issues that would not be advanced by resolving the proposed common issues, specifically whether an investor had relied on the misrepresentation when deciding to invest and what damages an investor had suffered.
The Divisional Court allowed the appeal and certified the class action, relying on the framework set out in the Supreme Court's decision in AIC v. Fischer. Specifically, the Divisional Court found that given that individual actions were not economically viable, there was no alternative means of pursuing the claims.
The Court stated that individual inquiries about an investor's reliance need not be complex because one uniform representation had been made to all investors. Although the Court agreed that the calculation of damages would be complex, it found that the need for individually assessed damages did not detract from the preferability of a class action.
A copy of the decision can be found here.
Discount Brokerage Firm obtains Summary Judgment For Unpaid Margin
Questrade Inc. v. Chow, 2015 ONSC 1450
The investor was purchasing and selling naked options and calls at a discount broker. The firm liquidated her margined portfolio at a cost of $88,000 to close the positions without giving the investor the choice to deposit greater margin. The Court held that the brokerage firm was not required to co-speculate with the investor, or wait for the investor's strategy. The Court awarded summary judgment in favour of the brokerage firm without expert evidence and based upon "iron clad" caselaw.
A copy of the decision is found here.
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