An exempt-market dealer (EMD) turned investment dealer, Red Cloud Securities Inc., has been sanctioned for serving retail clients before the necessary regulatory approvals were in place.
A hearing panel of the Canadian Investment Regulatory Organization (CIRO) approved a settlement agreement with Toronto-based Red Cloud, which will see the firm pay $600,000 in disgorgement, a $100,000 penalty and $15,000 in costs after admitting it violated rules connected to serving retail clients.
According to the settlement, the firm — which had been licensed as an EMD that was involved with private placements to retail investors — became licensed as an investment dealer in January 2020, but was initially restricted to serving institutional clients. Red Cloud was required to give up its EMD registration and wasn’t approved to serve retail clients until October 2020.
However, CIRO alleged that between January and October 2020, Red Cloud continued to serve retail clients without the required approvals.
“In this period, Red Cloud did not have any representative registered with the required proficiencies to service retail clients,” the settlement noted, and the firm wasn’t using know-your-client documentation that met CIRO’s standards for retail investors.
Additionally, CIRO alleged the firm didn’t establish adequate controls and supervisory systems, and processed retail private placements off-book between February 2020 and August 2021.
The settlement noted that none of the clients was harmed, and that the firm has since taken steps to fix its compliance shortcomings.
Under the settlement, Red Cloud agreed to disgorge the $611,306.18 in commissions and warrants it was paid for serving retail clients before it was compliant with CIRO’s rules.