REGISTRATION VIOLATIONS | UNSUITABLE EXEMPT MARKET SECURITIES AND RECORDKEEPING VIOLATIONS | PERSONAL FINANCIAL DEALINGS WITH CLIENTS
Complying with regulatory requirements is a critical and ongoing obligation and can help advisors and firms avoid costly and time-consuming regulatory investigations and enforcement actions.
N.S.B. was employed by CWB Wealth Management Ltd. (CWB) from May 2018; first as a Senior Portfolio Manager and Head of Research and then as Chief Investment Officer (CIO). According to the Settlement Agreement with the British Columbia Securities Commission (BCSC) of July 2022, N.S.B. held himself out as a portfolio manager and “acted as an advisor in securities without registration, contrary to section 43(b) of the [BC Securities] Act.” N.S.B. agreed to pay $30,000 to the Commission to settle the matter.
In determining the penalty, the BCSC considered the following mitigating factors:
N.S.B. admitted to the misconduct before the BCSC issued a Notice of Hearing and fully cooperated with the Commission’s review; and,
N.S.B. applied for registration before the Commission raised his registrable activities with him and ceased from engaging in and holding out as engaging in any registrable activities when told to by the Commission.
This case illustrates the importance of firm employees being duly registered in the appropriate registration category, based on the nature of their activities, and the importance of promptly acknowledging and addressing the misconduct. While acting as an advisor in securities without registration is a serious violation, N.S.B. acknowledged the breach and acted proactively to obtain the appropriate registration. There is very little grey area in cases of failure to register, so prompt acknowledgement and corrective action is generally the best course of action.
Summary Compliance Tips
Ensure all employees are duly registered in the appropriate category prior to engaging in any activities that require registration.
Review, at least annually, the registration status of all employees requiring registration.
Take prompt action as soon as you identify a registration issue by notifying the regulator, applying for registration and ceasing unregistered activities until registration is complete.
Ensure that you have training and policies that cover what registerable activities are, and monitor to ensure employees do not cross that line, either by conducting registerable activities, or holding out as if they are registered.
UNSUITABLE EXEMPT MARKET SECURITIES AND RECORDKEEPING VIOLATIONS
M.H.C. has been registered with the BCSC as an exempt market dealing representative since 2012. In a Notice of Hearing dated July 5, 2022, the BCSC alleged that, M.H.C. “failed to comply with his KYC and Suitability obligations and recommended unsuitable high risk exempt market securities to clients.” The commission further alleged that his firm, Ascenta Finance Corp, “failed to maintain records to demonstrate compliance” and the firm’s CCO “authorized, permitted or acquiesced in Ascenta’s contravention”.
According to the Notice of Hearing:
M.H.C. recorded inaccurate KYC information for five investors, failed to take steps to ensure he had sufficient KYC information to meet his suitability obligations and failed to take reasonable steps to ensure the securities were suitable for his clients before recommending them.
Ascenta failed to maintain records to demonstrate compliance with the suitability obligations.
Ascenta’s CCO permitted and acquiesced in Acenta’s contraventions thereby contravening the same provisions as the firm.
While a decision has not yet been rendered, this case demonstrates that the Commission takes KYC and suitability obligations seriously. In these cases, the Commission expects to find adequate KYC records that are accurate and consistent with the recommended investment(s). Also noteworthy is that the Commission did not just take enforcement action against the advisor but also the firm and the employee responsible for supervision.
Exempt market products are generally considered to be high risk. Advisors who sell exempt market products should record KYC information based on the actual client financial circumstances, risk tolerance and investment objectives; as opposed to documenting KYC based on the investment recommendation, even when it may be client solicited. Firm compliance staff should always review KYC information to ensure that it is accurate and complete, that there are no inconsistencies in the KYC information (e.g., an 80-year-old client with limited financial resources that is listed as high risk), and that the recommended investments are suitable.
Summary compliance tips
Obtain full and accurate KYC information for all new clients, and review and update KYC information when a new investment is recommended, when there is a change in client financial circumstances, and on a periodic basis.
Carefully document KYC information and your discussions with the client.
Only recommend investments that are suitable based on all KYC information.
For compliance staff:
Review KYC information and any other relevant records, including past KYC records, to ensure they are accurate and complete and that there are no inconsistencies.
Review all recommended investments to determine the level of risk and ensure the investments are suitable based on the client’s KYC information, which includes not just the client risk capacity, but investment objectives, investment time horizon, investment knowledge and personal and financial circumstances.
Ensure adequate records are kept of KYC information, the investment risk assessment and the compliance review of both the KYC and investment suitability.
PERSONAL FINANCIAL DEALINGS WITH CLIENTS
The respondent, N.F. has been an IIROC Registered Representative since 1994. Her client was an elderly woman who moved to Italy, had no children or immediate family and had a close personal relationship with N.F. for more than thirty years. In 2013, N.F. became aware that her client had appointed her as Power of Attorney (POA) and executor for her estate. In 2017, N.F. advised her Branch Manager (BM) about her appointment as executor but did not advise about the POA. The BM told N.F. that the appointment as executor was contrary to IIROC rules and firm policy and told her to ask her client to try to appoint someone else and, if this did not happen, she would need to take appropriate steps to resign. However, N.F. remained executor and did not update the firm.
In January 2019, N.F. acted as POA to have a $50,000 bank draft issued from her client’s bank account with another bank and delivered the cheque to the client’s lawyer. N.F. acted as POA on four other occasions by directing the bank to transfer funds to her client’s bank account in Italy. She did not disclose to her employer that she was acting as POA.
In March 2019, N.F. transferred her client’s account to another Registered Representative at the firm and had herself added as POA on the account. As POA, she was able to make investment decisions for the client, but she did not update her Branch Manager about the reason for transferring the account or the POA being added.
In July 2020, N.F. began acting as executor and collected $50,000 gifted to her by the estate.
IIROC found that N.F. breached IIROC rules as follows:
Acting as POA for a client contrary to Dealer Member Rule 43.2(5)(i); and
Accepting a monetary gift from a client contrary to Dealer Member Rule 43.2(1)
N.F. reimbursed the $50,000 monetary gift and agreed to pay a fine of $17,500 and costs of $5,000. N.F. was also subject to firm disciplinary actions including paying a fine of $12,500, re-writing and passing the Conduct and Practices Handbook (CPH) exam, reviewing and acknowledging the Standards of Conduct established by her firm and paying a separate fine of $7,500 for the second contravention. The fines collected by the firm were donated to charity.
In determining the penalty, IIROC considered the following mitigating factors:
N.F. admitted to the conduct, thereby reducing the time required to investigate.
N.F. had a longstanding personal relationship with the client and intended to help her client who had no immediate family members to assist.
N.F. paid a total of $20,000 in internal disciplinary fines and successfully re-wrote the CPH exam.
N.F. repaid the $50,000 monetary gift.
N.F. had no prior disciplinary history.
Advisors are in a particular position of trust with clients and may develop strong personal relationships. As such, it is sometimes requested from clients to want to name their trusted advisor as POA, trustee or Executor and clients may even give their advisor larger gifts. Advisors and firms should be aware that IIROC Rule 43 prohibits personal financial dealing with clients (with limited exceptions).
Summary compliance tips
Politely refuse to accept anything but nominal gifts from clients. Consult your firm’s internal guidelines regarding acceptable gifts and your firm’s compliance staff if there is any uncertainty.
MFDA and IIROC rules prohibit advisors from acting as a power of attorney, executor, or trustee for a client, except for immediate family members (parent, spouse or common law partner, grandparent, sibling or child). While provincial securities regulators have not codified an outright prohibition, they have provided guidance that they consider this to be a material conflict of interest that should be either avoided or resolved in the client’s best interest. To resolve such a conflict by prohibiting further financial dealing with the client or client estate while acting under a power of attorney, executor or trustee would impact the client, particularly if this was an unforeseen consequence of the appointment. Therefore, for all registered firm categories, we recommend prohibiting these appointments, unless the client is a Related Person as defined by the Income Tax Act. In that regard, Politely explain to clients that you cannot act as Executor, POA or Trustee unless the client is a Related Person as defined by the Income Tax Act, the matter is addressed in accordance with the firm’s policies and procedures, and the relationship is disclosed to and approved in writing by the firm.
Disclose all personal financial dealings to your Branch Manager or other appropriate compliance staff, follow their instructions carefully and update them on any potential issues.
If a breach has occurred, be sure to acknowledge the breach and take prompt corrective action.
Even the best advisors can make mistakes. While regulations may sometimes seem cumbersome or unfair, they are there for a reason. Breaching regulations can result in significant costs to advisors and their firms including penalties and fines as well as the costs and time involved in regulatory investigations and enforcement actions. Firms seeking guidance or addressing potential regulatory breaches can contact us for assistance at:
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