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.

The full text of the disciplinary decision can be read here, and of the penalty decision here.

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.

A full text of the disciplinary decision can be read here and of the penalty decision here.

Unsuitability for Physician of Leveraged ETFs.

Re Milot 2014 IIROC 55

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

A full text of the disciplinary decision can be read here and of the penalty decision here.

Unsuitability for Physician of Leveraged ETFs.

Re Milot 2014 IIROC 55

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:

  1. an aggregate fine in the amount of $20,000;
  2. six (6) months of close supervision;
  3. 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;
  4. costs in the amount of $2,500.

The full text of the settlement agreement can be accessed here.

IIROC Publications

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:

  1. 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;
  2. whether a registrant has committed one violation that impacts several different accounts or multiple violations in one account will be considered an aggravating factor;
  3. 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;
  4. 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;
  5. internally imposed discipline does not necessarily eliminate the need for formal discipline by IIROC.

The Revised Sanction Guidelines can be found here, while the Staff Policy Statements can be found here.

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:

  1. 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;
  2. have a due diligence plan that reflects the context of the offering and the level of due diligence that is reasonable to the circumstances;
  3. 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;
  4. 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;
  5. 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;
  6. appreciate that the extent of reliance on experts and other third parties is a contextual determination;
  7. 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;
  8. document the due diligence process to demonstrate compliance;
  9. 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.