Enforcement Year in Review
Enforcement’s efforts in fiscal year 2022 resulted in enforcement proceedings covering a wide range of issues and misconduct. go to footnote 1 The proceedings highlighted below illustrate our priorities, the regulatory misconduct we confront, and how we target our investigative and litigation resources.
Over $4 million in fines, disgorgement and costs were imposed by hearing panels on IIROC‑regulated persons (individuals and firms). Individuals were ordered to disgorge $211,736.87, an increase from prior years, as Enforcement continued to focus on ensuring that those who engage in misconduct do not financially benefit.
We continue to see the direct results of being granted the authority to collect fines through the courts. While our collection efforts occur over several years, this new authority has allowed us to collect a greater percentage of the monetary sanctions imposed on individuals than we have historically without such authority.go to footnote 2 The ability to collect monetary sanctions has impressed upon those who have broken or may potentially break rules that there will be significant consequences.
In April 2021, we announced that Enforcement would begin the use of Early Resolution Offers to promote the efficient resolution of enforcement proceedings. As we anticipated, the use of these offers has promoted the timely resolution of proceedings and saved regulatory resources. We reached early resolutions in four cases where there was proactive cooperation, remedial measures taken, and compensation made to clients.go to footnote 3
As part of Enforcement’s ongoing emphasis on timeliness and the efficient use of regulatory resources, we agreed to mediate several cases to reach a resolution. The mediation program has proved to be an effective tool to reach timely and cost-effective settlements.
Although most cases are resolved by way of settlement agreement, where a negotiated resolution is not achievable, we will not hesitate and are always prepared to advance our allegations in contested hearings. We continued to be active in this regard, commencing nine disciplinary hearings and concluding nine others, and actively litigating five appeals before provincial securities commissions or courts. In seven cases commenced as disciplinary hearings, the respondent ultimately chose to settle before the hearing began.
Where IIROC detects any potential market-related violations by clients of IIROC-regulated firms, we refer such matters to the relevant CSA jurisdiction. Both Enforcement and IIROC’s Trade Review & Analysis (TR&A) department work with CSA jurisdictions on matters of mutual interest. In FY22, TR&A referred 77 market-related cases to the CSA: Manipulation (27), Insider Trading (27) and other Securities Act Violations (23).
Protecting Seniors and Vulnerable Clients
Protecting seniors and vulnerable clients is a key priority for Enforcement. While most Approved Persons observe high standards of ethics and conduct, there are some who do not. Unfortunately, elderly or vulnerable investors are at higher risk of being exploited.
IIROC hearing panels imposed sanctions against:
Alfred Drose, after a disciplinary hearing where he did not appear, for failing to know his client and excessive trading. The hearing panel imposed a fine of $137,171, which included disgorgement of $112,171, a prohibition of approval for two years, go to footnote4 and ordered costs of $35,000. At the time the client opened an account with Drose, the Law Society of Ontario had more than a year earlier found that the client lacked capacity due to Alzheimer’s. Drose met with the client for five minutes when the account was opened, did not adequately review the know-your-client forms, and then had no further contact with the client. He engaged in excessive trading in the account for 17 months. The trading was not profitable and resulted in losses to the client as well as excessive commissions to Drose. This conduct was inconsistent with the standards of conduct required by IIROC Rule 1400.
Milan Plentai, in a settlement, was fined $45,000, ordered to disgorge $6,170, pay $10,000 in costs, and prohibited from being approved for two years. Plentai engaged in personal financial dealings by accepting payments from a client who had been diagnosed with Alzheimer’s, acted in a non-securities related capacity for the client without disclosing it, and allowed his wife to be named as a beneficiary of the client’s will. This conduct was a marked departure from the standards of conduct that apply to an IIROC-regulated person.
James Robert Harris, in a settlement, was fined $25,000, ordered to disgorge $15,000, prohibited from being approved for 30 days, and ordered to pay costs of $2,500. Harris failed to know his client, a retired widow with limited investment knowledge, who relied on withdrawals from her investment accounts for part of her monthly living expenses. The client’s stated investment objectives in her accounts were inconsistent with her true financial situation, investment knowledge, investment objectives and risk tolerance. Harris pursued an aggressive investment strategy in the client’s accounts that was unsuitable for her, involving an excessive level of risk for a vulnerable client relying on her investments for income. Over the course of almost five years, the client suffered losses of approximately $116,000 which represented a 23% net loss of her initial investment.
Know Your Client and Suitability
IIROC rules require that an Approved Person know detailed information about their client’s risk tolerance, investment knowledge and financial position. The Approved Person is required to determine whether an investment is suitable for a client, which requires that the Approved Person understands the investment product and knows the client.
IIROC hearing panels imposed sanctions against:
Yonathan Shields, after a lengthy disciplinary hearing, for failing to know nine of his clients and failing to ensure that investment recommendations were suitable for the clients. Shields accepted several client referrals from another Approved Person, who informed Shields that they were sophisticated and wished to execute a trading strategy involving the sale of naked options on commodities futures. Shields assumed the clients understood the risks and failed to make appropriate inquiries of the clients or inform them of the scope of the risk involved in the strategy. He failed to ensure that an options on futures trading strategy that was recommended for the clients was suitable, as many of them had no experience trading options on futures. In February 2018, due to market volatility, the clients experienced significant losses from the options on futures trading. The hearing panel imposed a $40,000 fine, ordered $64,054.80 in disgorgement, a prohibition of approval for one year, and $35,000 in costs.
Edward Ho Rha, after a disciplinary hearing, for engaging in a pattern of excessive and unsuitable trading for two sets of clients which generated significant commissions. He also borrowed $95,000 from another client which he never repaid. Rha was fined $150,000, suspended for a year, and ordered to pay costs of $15,000.
Enforcing High Standards of Conduct and Ethics
IIROC Rule 1400 addresses business conduct that demonstrates an unreasonable departure from the high standards and ethics expected of Approved Persons or that is detrimental to the public interest. The rule is enforced against a wide range of business conduct, including misappropriation and forgery. The two proceedings highlighted here represent conduct that over the past few years has been rare. Prior to this year, there had not been a finding of misappropriation since FY18 and only three cases of forgery in the past three years.
IIROC hearing panels imposed sanctions against:
Joan McCarthy, after a disciplinary hearing where she failed to appear, for falsifying signatures and appropriating funds from her clients’ accounts. McCarthy failed to cooperate with the IIROC investigation. The panel imposed a fine of $950,000, a permanent bar to approval, and costs of $50,000. Between 2006 and 2019, McCarthy misappropriated approximately $775,000 from the accounts of six elderly clients by forging their signatures on over 160 cheques.
Mohammad Movassaghi, after a disciplinary hearing where he failed to appear, for falsifying client signatures on client account documentation and for misleading Enforcement Staff in sworn interviews. The panel imposed a fine of $100,000, a permanent bar to approval, and ordered costs of $60,000.
Strengthening Market Integrity
Enforcement’s efforts to strengthen market integrity focus on enforcing the Universal Market Integrity Rules (UMIR), the rules governing trading on IIROC-regulated marketplaces, and ensuring that IIROC-regulated persons perform their role as gatekeepers to the capital markets, monitoring and identifying improper, manipulative, or disorderly trading. Dealer Members and Approved Persons occupy a privileged role in the securities regulatory framework and act as intermediaries providing access to the markets. Effectively discharging the gatekeeper obligation helps protect market integrity and the reputation of the capital markets.
Settlements were approved by IIROC hearing panels in relation to the following market integrity issues:
Larry Martin, was fined $82,000, which included disgorgement of the approximately $32,000 in commissions earned and ordered to pay costs of $20,000. Martin, an Approved Person at Leede Jones Gable Inc., facilitated trading in investment accounts that generated red flags suggesting that the activity was suspicious. The red flags included the deposit of large amounts of shares that were sold shortly thereafter, unprofitable trading, the transfer out of all or most of the proceeds of the sales, and significantly higher assets in the accounts than disclosed on client account forms. Martin had an obligation to question the activity as suspicious and to obtain reasonable explanations to satisfy himself that the activity was legitimate.
CIBC World Markets failed to comply with its trading supervision obligations to detect and prevent the entry of orders by a direct electronic access (DEA) client that interfered with fair and orderly markets, contrary to UMIR 7.1 and 7.13. Enforcement identified that the DEA client was responsible for numerous amendments and cancellations to orders entered in the pre-open session of an IIROC-regulated marketplace resulting in a significant number of changes to the Calculated Opening Price of numerous securities. CIBC had a supervisory obligation to examine each order entered on a marketplace by way of DEA and where circumstances warranted was required to make appropriate inquiries of clients to ensure the orders did not interfere with a fair and orderly market and were otherwise in compliance with UMIR requirements. CIBC was fined $150,000 and implemented remedial measures to ensure it would meet its regulatory obligations in the future.
Improving Industry Standards
Enforcement assesses in each investigation whether a Dealer Member has fulfilled its supervision obligations and met the stringent supervision requirements of the IIROC Rules. When advancing proceedings against firms, Enforcement’s focus is not merely on sending a deterrence message to prevent a repetition of the failure by that particular firm, but on ensuring that the firm has implemented adequate remedial measures to prevent against reoccurrence. Remedial measures that are tailored to the specific compliance and supervision failings are an important element in improving overall business standards and practices.
IIROC hearing panels imposed sanctions against:
iA Private Wealth, in a settlement, for failing to establish and maintain a system to supervise the activities of its employees reasonably designed to achieve compliance with IIROC supervision requirements. The activity included unsuitable investment recommendations to clients, high concentration and trading volumes in small issuers, and the improper use of margin in client accounts. The firm became aware of these issues following multiple client complaints, immediately reported the conduct to IIROC, and conducted an internal investigation. The firm implemented extensive remedial measures, settled many of the client complaints by paying compensation totalling over $5,000,000, and implemented new policies and procedures. This matter was resolved by way of Early Resolution Offer based on the firm’s proactive cooperation, the remedial measures taken, and the compensation paid by the firm. The firm paid a fine of $350,000 and costs of $25,000.
Canaccord Genuity Corp., in a settlement, for failing to establish a system of internal controls and supervision reasonably designed to achieve compliance with IIROC requirements, including to deal fairly with clients with regards to fees. Canaccord permitted in certain circumstances for trailer or embedded fees to be paid to itself for client account holdings in accounts that were fee-based. The amount of embedded fees incurred in fee-based accounts from January 2010 until Canaccord changed its policy in November 2019 was $1,406,261.50 which affected over 6,000 clients. The firm reimbursed current and former clients who held fee-based accounts during the period for any fees associated with products paying a trailer or embedded fee. The firm paid a fine of $157,000 and costs of $50,000.
Scotia Capital Inc., in a settlement, for failing to establish and maintain a system of controls and supervision to ensure client fee agreements were accurately recorded in its fee management systems and clients were charged appropriately. The firm discovered instances where fees charged to clients in fee-based accounts differed from the fees documented in the clients’ signed fee agreements, which resulted in some client accounts being overcharged, some being undercharged, and some having no impact. The firm initiated a review of fee agreements dating back to 2010 and implemented a remediation plan, including repaying clients who were overcharged because of the failure of internal controls. The firm committed to repaying $32,348,719.64 in respect of 38,979 client accounts. This matter was resolved by way of Early Resolution Offer based on the proactive and exceptional cooperation, compensation paid, and corrective actions taken by the firm. Scotia paid a fine of $140,000 and costs of $5,000.
Friedberg Mercantile Group Ltd., in a settlement, for failing to implement an adequate supervisory framework when onboarding accounts of clients from an online trading platform for trading Contracts for Difference based on commodities, foreign exchange, crypto currencies, and other assets. The firm’s deficiencies related to the account opening approval, incomplete or inaccurate books and records, and inadequate oversight of the activity relating to the client accounts. This matter was resolved by way of Early Resolution Offer based on the firm’s implementation of remedial measures and proactive and timely cooperation. The firm paid a fine of $223,000 and costs of $25,000.
- footnote 1 See Appendix A for the list of enforcement proceedings for fiscal year 2022 and the sanctions imposed in each proceeding
- footnote 2 See table on page 21, which shows IIROC’s collection rate over time
- footnote 3 See Appendix A: Re iA Private Wealth, Re Hanson, Re Scotia Capital, Re Friedberg
- footnote 4 A prohibition of approval is imposed where the individual is a former Approved Person and is equivalent to a suspension of approval of an active Approved Person.