Regulators have sanctioned Toronto-based Scotia Capital Inc. for failing to supervise two advisors who engaged in a risky trading strategy involving new issues that was unsuitable for a handful of their clients.
An Investment Industry Regulatory Organization of Canada (IIROC) hearing panel has approved a settlement agreement between IIROC staff and Scotia Capital in which the firm agrees to pay a $200,000 fine and $20,000 in costs. The firm also admits that it failed to supervise two advisors in its New Glasgow, N.S. branch from 2010 to 2014.
According to the settlement agreement, the firm has also paid more than $2.5 million in compensation to clients who were affected by a trading strategy that aimed to take advantage of the difference between the offering price of new issues and the price on the secondary market. In some cases, they also used leverage as part of their trading.
“Scotia was aware of concerns raised by its compliance officers and the relevant supervisor about the risks associated with the new-issue strategy,” the settlement states. “However, Scotia approved numerous clients for high-risk, short-term trading without adequately considering whether that was suitable for them, failed to fully investigate concerns about the new-issue strategy and failed to take effective action.”
According to the settlement, the firm’s compliance officers questioned the suitability, high turnover, concentration risk, high commissions, use of leverage and conflicts of interest. Yet, the reps were allowed to continue using the strategy. In April 2014, Scotia Capital’s compliance suggested account restrictions that limited trading by the reps, “but none were implemented.”
The advisors, David Chabassol and David Bugden, worked from a satellite location of Scotia Capital’s Halifax branch in New Glasgow. Earlier this year, one of those reps, Bugden, entered into a settlement with IIROC, admitting to making unsuitable recommendations to one client, and approving account documentation for two others without adequate due diligence.
In settling that case, Bugden agreed to pay $40,000 in fines and $5,000 in costs, receive close supervision for one year and re-write the Conduct and Practices Handbook exam. That settlement notes that the trading was generally profitable for the client, who never complained about the strategy.
Wednesday’s settlement with Scotia Capital indicates that the new-issue strategy was not suitable for at least three of the advisors’ clients and that the trading in their accounts “was not consistent with good business practice due to the significant commissions generated as compared to the unsuitable risk undertaken.”
In addition to the fines, the settlement indicates that an unnamed supervisor was required to contribute $100,000 to client remediation. The settlement requires Scotia Capital to donate that money to charity.
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