On July 29, 2016, the OSC approved a no-contest Settlement Agreement with respect to Scotia Capital Inc., Scotia Securities Inc., and HollisWealth Advisory Services Inc. (together, the Scotia Dealers) in response to allegations by OSC Staff of inadequacies in the Scotia Dealers controls and supervision systems, resulting in a failure to detect or correct the charging of excess account fees to clients.
This case hinged on the alleged “double dipping” of client fees. In particular, the OSC alleged that the Scotia Dealers incorrectly classified a number of client accounts for fee billing purposes, and as a consequence, clients that had purchased structured products in fee-based accounts were paying account fees to Scotia Dealers, who were additionally receiving trailer fees from the issuer. As a result, these clients paid excessive fees because the fee calculation for the structured products did not exclude the trailer fee component received on the managed accounts.
This has proven to be costly for the Scotia Dealers, as under an OSC-approved compensation plan there is an anticipated compensation payment to affected clients of approximately $20 million, in addition to a voluntary payment of $850,000.
In addition to the above compensation payments, the Scotia Dealers agreed to terms and conditions including close supervision by the OSC and a timeframe under which to remedy any remaining issues with their policies and procedures.
The Scotia Dealers case highlights the importance of reviewing one’s compliance systems to ensure adequate measures are in place to avoid control and supervision inadequacies. It is also important for funds charging trailer fees to ensure that the possibility of double dipping is examined closely, as a failure to do so could be a costly affair.