IIROC

Policies and Procedures

IIROC Notice 14 – 0044: Borrowing for Investment Purposes – Suitability and Supervision

This Guidance Notice focuses on investor loans obtained from a third party for the purposes of investment (“off-book lending”) and holds that dealers must have adequate systems and controls to flag any investor accounts that involve off -book lending whether recommended by the investment adviser or not. The Guidance does recognize that where off-book loans are instigated by the client, they may be difficult to detect or supervise and therefore is “not expecting” “an expansive compliance framework to identify and monitor such loans”. It provides that off book lending be subject to preapproval. It also recommends best practices for both registered representatives and their dealers. Highlights are summarized here.

Enforcement

Unauthorized Trading
Chang (Re), 2014, IIROC 04

IIROC imposed a permanent ban and a fine of $100,000 on Lawrence Chang as a sanction for making six unauthorized purchases for a total of approximately $498,160 in a client’s account without authorization. He also misrepresented account holdings to hide the purchases. The Respondent had not been in the industry since 2009. (The Panel’s decision in Chang (Re), 2014 IIROC 04, is summarized in greater detail here).

Supervision

Canaccord Genuity Corp. (Re)

IIROC accepted a settlement agreement that required Canaccord Genuity Corp. to pay a fine of $750,000 and disgorge commissions of $310,000 for failing to adequately supervise retail client account activity. The agreement related to tier 1 and tier 2 supervision, as well as procedures to ensure clients who purchased private placements were accredited investors. A summary of the Settlement Agreement in Canaccord Genuity Corp. (Re), 2014, IIROC 3 is found here.

MFDA

Policies and Procedures

Whistleblower Program

The MFDA issued a bulletin announcing the establishment of a Whistleblower Program to receive information about misconduct by MFDA approved persons or members. The Program provides a hotline and email address to report such information.

Enforcement

Leveraged Investments

Following a contested hearing, the MFDA found that Arthur Pretty breached know-your-client and suitability requirements by recommending leveraged strategies to unsophisticated investors without properly explaining the associated risks. The Panel accepted expert evidence that “leveraged strategies using return of capital mutual  funds are likely to be suitable only when the investor is sophisticated, has a long investment horizon, a very high risk tolerance, very aggressive investment objectives, understands the risks of leverage and has back up sources of income and net worth.” (Arthur George Pretty (Re), File No. 201128))

Blank/Partially Completed KYC Firms

The MFDA approved a Settlement Agreement with William Clarke who admitted to using blank or partially completed forms to process transactions and to operate client accounts. He also admitted to altering account forms after clients had signed them. Clarke agreed to a prohibition from acting in a supervisory capacity, and was subjected to a fine of $7,500 and a costs award of $2,500. (William Clarke (Re), File No. 201356).

The MFDA also approved a Settlement Agreement with Michael Kant who admitted to altering previously-signed account forms to process transactions, paying a fine of $7,500 and a costs award of $2,500. (Michael Kant (Re), File No. 201357)

Ashutosh Kumar Singh was suspended for two years, fined $5,000, and made subject to a $5,000 cost award for using forms bearing photocopied client signatures relating to 85 clients to process trades and to update Know-Your-Client information, and for maintaining blank pre-signed forms for 7 different clients. He did not attend the hearing and was unrepresented. (Ashutosh Kumar Singh, File No. 201349)

Undisclosed Outside Business Activities

Following a hearing, Murray Greenberg was found to have sold over $13 million of investment products to over 40 clients which were not processed through his employer. He was subject to a permanent ban, a $250,000 fine and a $10,000 cost award. (Murray Greenberg (Re), File No. 201326, reasons to follow).

Following the contested hearing, the MFDA imposed a $5,000 fine on Lodovico Angelo Cavan who failed to disclose and obtain approval for a business carried on through three corporations. The three corporations were then allegedly used by an acquaintance to defraud her employer. Cavan received over $117,000 in payments and benefits from these corporations but later repaid $90,000 in a settlement, which the Panel took into account when determining appropriate sanctions. (Lodovico Angelo Cavan, File No. 201313).

Class Actions

New ruling on limitation period in secondary market misrepresentation actions

The Ontario Court of Appeal found that a class action for misrepresentation in secondary market disclosure under
s. 138.3 of the Securities Act is only barred if the Statement of Claim is not issued within three years of the misrepresentation. This decision reversed the Ontario Court of Appeal’s earlier decision in Sharma v. Timminco, which found that a class plaintiff must obtain leave for the action under s. 138.8 within three years of the misrepresentation. (A summary of the decision, Green v. Canadian Imperial Bank of Commerce, 2014 ONCA 90, is provided here).

Directors and Officers

Courts to scrutinize advances paid for legal costs

The Supreme Court of Canada declined to hear the appeal advanced by a number of directors who were denied an advance of their legal costs under an indemnity agreement. On July 4, 2013, the Ontario Court of Appeal found that if a corporation brings an action against a director or officer, section 124(4) of the Canada Business Corporations Act requires an officer or director to obtain court approval before receiving an advance of legal costs to defend that action under an indemnity agreement. Where a court finds a strong prima facie case that the director or officer has engaged in bad faith dealings, it must deny the advance of legal costs, notwithstanding the terms of any indemnity agreement. (A summary of the Ontario Court of Appeal decision, Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, is provided here).

White Collar Securities Proceedings

Alberta Securities Commission Releases New Record Production Rule

The Alberta Securities Commission has released a new rule that imposes requirements on respondents to produce electronic documents. The new rule, discussed in detail here, notably requires respondents to provide documents in native electronic format, with all associated metadata, and to issue a hold notice to preserve potentially relevant documents. Rule 15-503 Production of Records, and its companion policy, came into effect on March 1, 2014.

Misappropriation

Mesidor (Re)

The British Columbia Securities Commission found Jefferson Franklin Mesidor liable for fraud and issued an order to pay $75,000 and to permanently bar him from participating in securities markets. Mesidor had been transferred $32,280 from two investors for foreign exchange trades, but instead misappropriated $16,000 for his own use. Although Mesidor later returned $2,000 of the misappropriated funds to his clients, the Commission found that Mesidor has committed fraud in respect of the full $16,000. (Mesidor(Re), 2014 LNBCSC 6).

Other Author

James Gibson

Authors

Laura Paglia 
LPaglia@blg.com
416.367.6050

Sandi Shannon 
SShannon@blg.com
403.232.9782

Loni da Costa 
LdaCosta@blg.com
403.232.9696

Other Author

Landon Miller

Expertise

Securities Litigation
Securities Registrant Regulation and Compliance
Litigation and Arbitration