As a result of a contested hearing, an MFDA registrant was
permanently prohibited from conducting any securities-related
business in MFDA jurisdiction and subject to a $750,000 fine with
$20,000 in costs for recommending unsuitable leverage investments
in return of capital ("ROC") and conventional mutual
funds to 18 clients.
The clients took out loans to invest in mutual funds and
segregated funds. The Panel considered the cost of carrying loans
for segregated investments was considered relative to the
client's total debt obligations. The Respondent sold
insurance to some clients. Those insurance costs were also
considered relevant by the Panel in determining the client's
total monthly debt obligation.
With one exception, the clients did not have prior experience in
borrowing to invest.
Although the client signed risk disclosure documents, the panel
held and found relevant that the Respondent did not discuss the
contents of the disclosure document s with them.
The Panel found that a suitability analysis involved 3
Know the product and the client.
Sound judgment to determining suitability.
Disclosure of negative aspects of proposed investments.
The analysis of the harm to client included "quantifiable
harm" (their losses) and "incalculable harm", which
was defined as the need to make up the shortfall to service the
loans when the distributions declined.
Read the full decision here.
Another mutual fund advisor was fined $40,000, plus costs of
$10,000 for recommending unsuitable leveraged strategies to 25
clients. The advisor would refer the client to a mortgage broker
who would determine the clients' "available equity"
based on an amount equal to at least 75% of the value of the
client's home less any debt owed on the home. In many instances
clients used a 2:1 or 3:1 investment loan as secured by their home.
All borrowed monies were used to purchase ROC mutual funds. The
advisor recommended the use of distributions to make monthly and
accelerated payments on their debt. The advisor also recommended
they purchase a life insurance policy from him. Once the loans were
paid with the ROC funds, he advised he could continue to use them
for other purposes and the insurance would repay any outstanding
amounts upon death.
The advisor agreed he overstated income and assets and
understated liabilities on some account openings and loan
applications. He agreed his clients were misinformed the investment
strategy was low risk and had limited investment knowledge and time
horizons due to age, health issues and liquidity needs. Read the full settlement agreement here.
Failure to Supervise for Suitability: By Branch Manager
A branch manager received a one-year suspension and other
restrictions, including the completion of an IFSE MFDA Compliance
course, a prohibition on acting in a supervisory capacity for 7
years, and 6 months of close supervision. The Branch Manager either
sold or was responsible for the supervision of mutual fund advisors
who sold certain prospectus exempt-debentures. The Branch Manager
did not use a "portfolio approach" to review the
debentures' suitability for a client's account. With
incorrect direction form the dealer, he did not conduct a detailed
review to determine whether the investors were accredited and
considered non-financial assets for the purposes of accredited
qualification. The Respondent sold the debentures to 40 clients who
had indicated a risk tolerance of less than high on their KYC (or
no risk tolerance) and supervised 4 mutual fund advisors who sold
the debentures to 31 clients in similar circumstances. He was paid
a salary and received no additional compensation as a result of the
sales. The dealer was separately disciplined for its deficiencies.
Read the full settlement agreement here.
Note: MFDA enforcement activity regarding pre-signed and/or
altered forms has been voluminous. Some settlements were previously
reported to you in our other publications of 2015. These
settlements have continued.
Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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