Fund dealer Scotia Securities Inc. has been fined $1 million and is voluntarily paying almost $11 million in client compensation after uncovering misconduct — including fund reps who fiddled with their annual sales stats and set up false, post-dated transactions to boost performance — that resulted in numerous terminations.
A hearing panel of the Mutual Fund Dealers Association of Canada (MFDA) approved a settlement with Scotia Securities that aims to address supervisory lapses. In settling the case, Scotia admitted to the violations and agreed to pay a $1-million fine and $75,000 in costs.
According to the settlement, the supervisory failings were revealed as the firm uncovered several forms of misconduct that allowed unscrupulous reps to boost their own performance numbers.
Specifically, the firm found instances of reps who manually altered their annual sales results; who set up and then immediately cancelled pre-authorized contribution plans (PACs) before the first contribution was carried out; and who processed certain transactions as redemptions and new purchases rather than as fund switches.
In some instances, these actions had valid reasons or resulted from honest misunderstandings of the firm’s processes. In other cases, however, the firm concluded that the reps in question had engaged in “egregious misconduct” that led to their termination.
According to the settlement, a total of 18 reps were terminated for altering their sales results, 14 were fired for setting up fake PACs, and two were let go for improperly processing fund switches.
A number of reps also resigned from the firm before it carried out the internal disciplinary process that resulted in the terminations.
The firm was the primary victim of reps altering their sales numbers and setting up fake PACs, but clients were most affected by the improper treatment of fund switches. As a result, the firm is paying about $3.75 million in compensation to clients harmed by those transactions.
The settlement with the MFDA also covered several other issues at Scotia Securities.
Most significantly, the SRO found the firm failed to prevent clients from buying unsuitable funds for their non-registered accounts, with distributions that were considered income and taxed at a higher rate than capital gains.
As a result, the firm is expected to pay at least $6 million in compensation to clients who paid excess taxes as a result of buying the unsuitable funds between 2015 and 2021.
The firm is paying another $1.1 million to address service issues — including clients who didn’t receive redemption cheques “in a timely manner” after the firm shifted to remote working early in the pandemic.
To address the harm caused by these processing delays, the firm is paying another $740,145 in compensation to clients who had to wait for their money.
The MFDA also found that, between Nov. 24, 2021 and Feb. 9, 2022, account transfer requests sent to one of the firm’s fax servers weren’t processed in a timely way. That issue is expected to generate another $350,000 in compensation to affected clients.
All told, Scotia is expected to pay at least $10.8 million in compensation to clients along with the MFDA’s sanctions for the supervisory failures that allowed the misconduct to occur.
The firm also promised to comply with the rules it admitted to violating, and the settlement acknowledged changes to address the issues.
Scotia “has and is developing substantial widespread process and governance enhancements to prevent contraventions similar to those addressed in the settlement agreement from occurring in the future and to ensure sufficient training of its [reps],” it noted.