IIROC

IIROC Enforcement Proceedings

Suitability

(a) Commissions Compared to Losses Incurred For One Client
Simon Roy Jaques, Decision 14-0185

The Respondent, an investment advisor, was unresponsive to IIROC and did not participate in the hearing. He was fined $50,000 for his failure to cooperate.

He was also found to have failed to use due diligence to ensure that orders for one client were suitable.

Client was 56 years old, retired with $70,000 income, $30,000 in spousal income, $750,000 in liquid assets, $350,000 in fixed assets, 50% medium and 50% high risk objectives. Investment assets were required to produce income as she was unable to work due to illness.

The purchase and sale of Orko Silver Corp. was found to be unsuitable in part because the Respondent earned $675  in commissions while the client incurred a loss of $3,953. Further purchases of resource based securities in a margin account which generated losses to the Client but profit to the Respondent were also found unsuitable.

A further purchase of KCC Capital Corp. at a cost of $15,000 was also found to be unsuitable as it is stated the Respondent earned $1,200 in commission “paid by KCC”. It is unknown whether or not the client incurred losses.
Respondent was fined an additional $30,000 for these suitability infractions. Costs were also ordered in the amount of $20,000.

The full text of the decision can be read her​e.

(b) The Cheapest Option not offered
Re: David Edward Sloan, Decision 14-0191

The Respondent, an investment advisor, admitted to discretionary trades with a value “in excess of $30,000”. These are described in the Settlement Agreement as unauthorized as opposed to discretionary.

The Respondent further admitted that he failed to report accurate risk tolerances and investment objectives when  he recorded 100% high risk and 100% aggressive income in respect of 13 client accounts when “he knew or ought to have known that the information did not reflect the true profile of these clients”. All of the clients were born between 1919 and 1945.

With respect to “at least” 20 clients, which included the 13 clients above, the Respondent further admitted that he recommended securities on the basis of certain fees and purchase options when less expensive options to purchase the same securities were available, but not offered to client.

It was admitted that this conduct resulted in the Respondent receiving the highest available compensation for the purchases. In particular, he recommended and used a 5% frontend fee for a total charge to these clients of approximately $12,200 for the Hartford Fund. The dealer’s policies recommended charging a minimum 3.5% frontend fee.

The Respondent admitted that he failed to advise his clients that the frontend fees could be less than 5%. Although he was aware of a DSC option, he did not recommend it. He admitted that none of his clients required access to their funds in a time frame that would justify the selection of a 5% frontend fee over a DSC option, but he received the same compensation as he would have received on a DSC basis. (Note: this is curious due to past regulatory skepticism regarding DSC).

The Respondent was fined $13,000, suspended for one month, ordered to rewrite the CPH, subject to one year of strict supervision and costs of $2,000. He had been unemployed for 18 months and evidenced financial hardship in order to minimize the fine.

A full text of the Settlement Agreement can be read here.

(c) Time Discretion for Knowledgeable Client
Ronald Anton Putzi, Decision 11-0180

The Respondent admitted to failing to use due diligence to ensure that recommendations he made in respect of three client accounts were suitable.

He further admitted to conducting discretionary trades with respect to one of those accounts.   

With respect to unsuitability, the time period at issue was selected to be November, 2010 through to August, 2011, as opposed to the inception of the accounts. There is no explanation as to why this time period was selected.

Two of the three clients comprised a married couple in their early 40’s. One spouse was self-employed as a chartered accountant with an annual income of $350,000. The couple had fixed assets of $2,850,000, liabilities of $325,000 and estimated liquid assets of $325,000. The chartered accountant had 18 years of investment experience and trading authorization over his spouse’s accounts.

Their investments were found to exceed the risks in their new client application forms. The settlement agreement indicated a 21% and 38% respective decline in their accounts between October 31, 2010 and August 31, 2011, which translated to an approximate loss of $64,408.17 during this period, though it is unknown whether this was realized or reflective of the entire currency of the account.

Admissions regarding discretionary trading were with respect to the chartered accountant’s accounts. It was found that he did not have an understanding of the risk of Horizons Beta Probe S&P 500 BIXETF in respect of which some form of time discretion was used regarding the sale.

The Respondent had already paid an internal fine of $25,000 to his dealer, rewritten the CPH course, was under heightened supervision for one year and had no prior disciplinary history.

He was fined an additional $25,000 and ordered to pay $2,500 in costs.

A full text of the Settlement Agreement can be read here.

Advisor Neglectfully Maintaining a High Ask Price for Insider Client
Re Savard, 2014 IIROC 32 Decision No. 14-0152

The Respondent, an investment advisor, admitted to participating in manipulative or deceptive methods, acts,   or practices involving a security, even though he reasonably ought to have known that such participation was intended to maintain the sale price, ask price and bid price within a predetermined range contrary to UMIR Rule and Policy 2.2.

The facts, which are set out in great detail in the settlement agreement included that the Respondent either knew  or ought to have known that the husband, an insider, was controlling his spouse’s account to enable her to buy the securities in question (VTC.P). Similarly, the Respondent knew or ought to have known from his years of experience in the industry that the purpose of the husband’s dealings was to maintain the price of VTC.P until the qualifying transaction and private placement could be completed.

Agreed penalties were: a) a suspension of market access for a period of 30 days; b) a fine of $25,000; and c) a strict supervision for a period of eighteen months with monthly reporting to IIROC attesting that supervision was performed. The Respondent also agreed to pay costs to IIROC in the amount of $5,000.

A full text of the decision can be read here.

Suspension Imposed for Breach of Prior IIROC Settlement Terms:
Re Rotstein, Decision 14-0164

The Respondent, an investment advisor previously disciplined by IIROC, admitted that he entered an unauthorized trade in a client account while subject to close supervision imposed under a prior IIROC settlement agreement.

Due to the prior discipline, agreed upon sanctions were (a) prohibition from registration with IIROC for a period of  18 months; (b) strict supervision for a period of two years thereafter; (c) maintenance of written records of any and all client trading instructions during these two years; and (d) written records shall be made available to IIROC Staff on request for inspection. The Respondent also agreed to pay costs in the amount of $5,000 to IIROC.

A full text of the decision can be read here.

MFDA

MFDA Enforcement Proceedings

Failure to Obtain Proper Trading Authorization
Re Bradley Griffith, File No. 201329

The MFDA approved a settlement agreement in circumstances where the Respondent processed trades based on requests from someone other than the client. In doing so he failed to obtain proper authorization for redemptions of approximately $39,516 from the client’s account, contrary to MFDA Rule 2.3.1(a) and Rule 2.1.1. The Respondent also failed to report to the Member a complaint he received, which raised the prospect of nine instances of unauthorized trading in the client’s account, contrary to MFDA Rule 1.2.2(b), and Rule 2.1.1.

The Respondent agreed to the terms of settlement which included: a fine in the amount of $10,000, costs in the amount of $5,000, future compliance with MFDA Rules, and attendance at the Settlement Hearing in person.

A full text of the Settlement Agreement can be read here.

Unapproved ​Outside Business Activities 
Re William Cormylo, File No. 201323

A Hearing Panel of the Prairie Regional Council issued its decision in the William Cormylo file, which found him guilty of two charges levied by MFDA Staff. These charges were: 1) engaging in securities related business not carried on for the account or through the Member in respect of investment products totaling at least $4,361,390; and 2) engaging in another gainful occupation which was not disclosed to and approved by the Member. Cormylo had entered into certain unapproved outside business activities including promotion of investment products and referral arrangements with various companies whereby Cormylo received a commission for monies invested. The outside business activities and “off-book” transactions were unapproved.

As a result of his misconduct, the MFDA ordered: a permanent prohibition on the authority of the Respondent to conduct securities related business; a global fine in the amount of $300,000; and costs of $7,500.

A full text of the decision can be read here.

MFDA Publications

Guidance on use of Investor Questionnaires

With recognition that several of its members use or are considering the investor questionnaires to assist in the know-your-client process, the MFDA has developed a discussion paper on the issue. The paper discusses many topics such as designing an investor questionnaire, implementation considerations, benefits and limitations of employing a questionnaire and a Sample Investor Questionnaire attached as an appendix.

For a full text of the discussion paper, see MFDA Bulletin #0611-C.

OSC

OSC Authority to Conduct Reviews Broadened

Recent changes to Ontario’s Securities Act (OSA) have widened the OSC’s authority and ability to conduct continuous-disclosure and compliance reviews.

The biggest changes to the OSC’s review powers can be found in the amended s. 20, and s. 20.1 of the OSA. These amendments came into force on July 24, 2014. Previously s. 20 allowed the OSC to review “books and records that were required to be kept by market participants”. The amended s. 20 expanded this authority to review any records, not just those that market participants are required to keep under applicable law.

In addition to this, s. 20.1 has now broadened both the types of documents that may be required in a continuous disclosure review, and the type of issuer to which the provision applies. Continuous disclosure reviews can now be conducted on any issuer (previously reporting issuer) who may be required to deliver to the OSC any information and documents relevant to the review (previously information and documents relevant to disclosures). The OSC has not yet released any guidelines on how the amended provisions will change their review process.

A full copy of the amendments can be read here.

OSC Compliance Review Results

The OSC has issued the results of the compliance reviews conducted by its compliance and registrant regulation branch over the past year.

A full text of OSC Staff Notice 33-745: Compliance and Registrant Regulation-Annual Summary Report for Dealers, Advisors and Investment Fund Managers can be found here.

With respect to registration, it reviews various trends including pre-registration reviews, suggested practices for such reviews, conflicts of interests, outside business activities, individual registration applications and proficiency requirements.

With respect to compliance reviews, general outcomes of reviews in all registration categories are provided. They show an increase from last year in enhanced compliance, the imposition of terms and conditions on registration, the surrender or suspension of registration and referrals to enforcement.

Also, with respect to compliance reviews, current trends in deficiencies and acceptable practices are provided. These include non-compliance with KYC, KYP, other suitability and accredited investor requirements. Repeat and common deficiencies are also listed with “inadequate compliance system and UDP and CCO not meeting their responsibilities” topping such list.

Exempt market dealers have some prominence in the review. The OSC continues to have “significant concern” with EMDs that trade in or recommend related party products. EMD reviews are described as continuing to focus on areas found problematic in recent years. These include adequate compliance systems, identifying and responding to conflicts of interests, suitability, product review and fair sales practices.

PMs and IMFs are also each reviewed in separate sections in this report.

Court Proceedings

Investor Held Contributory Negligent On Appeal
Marlin Investments Inc. v. Moldovan, 2014 BCCA 364

The appellant invested in a high risk options trading program, which was initially profitable. The trial judge found the program unsuitable and ordered damages by deducting the program’s initial gains from its eventual losses. This approach to damages was affirmed on appeal.

The plaintiff was a corporation wholly owned by Kenneth Marlin. He had held senior positions selling mutual funds at investment firms in the 1970s and 1980s. He declared bankruptcy in 1988. He was 82 years old when he opened accounts with at the defendant dealer, had very few fixed assets and was living on government subsidies. His new client application form showed estimated net worth of $700,000, annual income of $50,000 and extensive experience in options, all of which was found to be untrue.

On appeal, Mr. Marlin was found to be 20% contributory negligent because he “did not in his own interest take care of himself”. He chose to participate in the program despite his inexperience in options, his limited finances and ailing health.

A full copy of the appeal decision is found here.

Requests to Inspect Documents “Cannot Be Used as a Fishing Rod” 

Mask v. Silvercorp Metals Inc., 2014 ONSC 4161.

Mask, a shareholder, sought the required leave to bring an action for misrepresentation in secondary market disclosure under Part XXIII.1 of the Securities Act, R.S.O. 1990, c. S-5 (“OSA”) against Silvercorp Metals Inc., which he intended to certify as a class action.

Silvercorp filed a number of affidavits opposing the leave motion. Prior to cross-examining Silvercorp’s affiants, Mask brought a motion to inspect confidential documents alluded to but not included in those affidavits.

Justice Belobaba denied Mask’s request to inspect. He held that a request to inspect “cannot be used as a fishing rod” to carry out discovery, and affirmed the court’s discretion to deny such motions, especially before cross- examinations have been conducted in a leave motion. Justice Belobaba further added that any Request to Inspect Documents must be restricted in scope and content to a “manageable dimension”. This “manageable dimension” should be congruent both with the principles of documentary productions, and the underlying policy objectives
of the OSA leave provisions.

The decision is available here.

Executive Compensation- Business Judgment Rule Clarified
Unique Broadband Systems, Inc. (Re), 2014 ONCA 538

In Unique Broadband Systems Inc. (Re), the Ontario Court of Appeal affirmed a judgment finding that McGoey, a former director, had breached his fiduciary duties to Unique Broadband Systems, Inc. (“UBS”). Mr. McGoey had caused UBS to confer certain benefits to himself under a Share Appreciation Rights (“SAR”) plan as if shares had been trading at $0.40 per share, when in fact they were trading at $0.15 per share.

In considering McGoey’s cross-appeal, the Court of Appeal provided valuable guidance on the business judgment rule that protects officers and directors from judicial review of business decisions made while running a company. Justice Hourigan explained:

It must be remembered that the business judgment rule is really just a rebuttable presumption that directors   or officers act on an informed basis, in good faith, and in the best interests of the corporation. Courts will defer to business decisions honestly made, but they will not sit idly by when it is clear that a board is engaged in conduct that has no legitimate business purpose and that is in breach of its fiduciary duties. (para. 72)

The business judgment rule therefore only applies in the event that an officer or director has satisfied the “rule’s preconditions of honesty, prudence, good faith, and a reasonable belief that his actions were in the best interests of the company”.

The Court of Appeal also reversed the trial judge and found that a management services agreement did not allow McGoey to benefit from a “golden parachute” pay-out because of McGoey’s fiduciary breach. In construing the agreement, Justice Hourigan stated that McGoey could not “eviscerate” his fiduciary duty under the OBCA by contracting for compensation that accrued even in the event that he breached that fiduciary duty.

This approach is not unlike that taken in Cytrynbaum v. Look Communications Inc., 2013 ONCA 455, which related to the same facts. In that case, the Court of Appeal found that the OBCA prohibited advance funding for legal expenses under a broadly worded indemnification agreement to Mr. McGoey, among other people, to defend the  same Board decision in respect of the SAR plan because the company had made out a prima facie case of bad faith.

The full text of the decision is available here.

Class Actions

Trilogy of Cases on Limitations Periods in Securities Class Actions Granted Leave to be heard at the Supreme Court of Canada

On August 7, 2014, the Supreme Court of Canada granted leave to appeal three securities class action cases, which will be heard together. These cases are:

  1. IMAX Corporation et al. v. Marvin Neil Silver et al., (SCC) A full text is at 2014 CanLII 45835.
  2. Celestica Inc. et al. v. Trustees of the Millwright Regional Council of Ontario Pension Trust Fund et al., (SCC). A full text is at 2014 CanLII 45838.
  3. Canadian Imperial Bank of Commerce et al. v. Howard Green et al., (SCC). A full text is at 2014 CanLII 45836.

National Securities Regulator

Parties of the Initiative Publish Draft Legislation and sign Memorandum of Understanding

On September 8, 2014, federal government’s push to create a National securities regulator received a boost with the announcement of the signing of a memorandum of agreement formalizing the terms of the Cooperative Capital Markets Regulatory System, the proposed national securities regulator for Canada.

Michael de Jong, British Columbia’s Minister of Finance, Charles Sousa, Ontario’s Minister of Finance, Gordon Wyant, Saskatchewan’s Minister of Justice and Attorney General, Troy Lifford, New Brunswick’s Minister of Justice, and Joe Oliver, Canada’s Minister of Finance, have all signed the Memorandum of Agreement formalizing the terms and conditions of the Cooperative Capital Markets Regulatory System. Consultation drafts of uniform provincial capital markets legislation and complementary federal legislation have also been released for public comment.

This Cooperative Regulator would create and administer a national set of regulations and would have the same authority of each of the participating provinces. The Federal government hopes that a “cooperative securities regulator will better protect investors, enhance Canada’s financial services sector, support efficient capital markets and manage systemic risk.” As work continues toward the operationalization of the Capital Markets Regulatory Authority targeted by fall 2015, the participating jurisdictions reiterated their invitation to the governments of other provinces and territories to participate in the Cooperative System. Alberta and Quebec have remained steadfast in their refusal to be part of the initiative, and remain opposed to a national securities regulator.

The memorandum of understanding, as well as all new updates on the Cooperative Capital Markets Regulatory System can be accessed at their newly constructed website: http://ccmr-ocrmc.ca/.

Authors

Devin Persaud 
DPersaud@blg.com
416.367.6298

Laura Paglia 
LPaglia@blg.com
416.367.6050

Expertise

Corporate Commercial Litigation and Arbitration
Securities Litigation