Scotia Capital Inc. has settled with the Investment Industry Regulatory Organization of Canada (IIROC) after discovering that dozens of advisors with DundeeWealth, a division of DWM Securities Inc., which Scotia acquired in 2013, had sold exempt funds to hundreds of clients who didn’t actually qualify for a prospectus exemption.
An IIROC hearing panel has accepted a settlement agreement on between Scotia and IIROC staff that will see the firm pay a $500,000 penalty and carry out a voluntary remediation plan designed to fix the supervisory deficiencies uncovered in the case and reimburse client losses, IIROC announced on Tuesday.
According to the settlement, Scotia admitted that between Sept. 14, 2005 and June 2013, DWM violated IIROC rules by failing to establish and maintain controls and supervisory systems to ensure that clients buying funds under prospectus exemptions, were actually qualified to do so.
DWM was acquired by Bank of Nova Scotia in February 2011, and amalgamated with Scotia Capital on Nov. 1, 2013, after which it was rebranded as HollisWealth. In mid to late 2012, Scotia identified deficiencies in documentation to support whether clients qualified for an exemption. As a result, it conducted an internal review of all exempt funds that were sold to clients between 2005 and 2013 to determine the scope of the issue, and reported the results of that review to IIROC.
The Scotia review found that exempt funds, including both proprietary and third-party funds, were sold to almost 10,000 clients over the eight years under a variety of exemptions. Of those, the review identified approximately 1,710 clients where the account information did not support the clients’ qualifications for an exemption, and the clients had already sold the fund.
Of these unqualified clients, just under 600 experienced combined losses of about $4.5 million; the rest had total net gains of approximately $16.7 million. Most clients (84%) lost less than $25,000, and only one lost more than $100,000, the IIROC settlement notes. Scotia also found that 72 of its advisors had clients that suffered losses through these improper sales.
According to the IIROC settlement, Scotia is implementing a voluntary remediation plan that will pay clients who have suffered a net realized loss, the amount of the loss plus interest. As well, Scotia will encourage clients that still own these funds to redeem their holdings and receive payment for any net realized losses.
Scotia is also imposing internal fines on the affected advisors totalling $440,000, which will be donated to charity, and requiring the advisors to contribute some of the restitution to clients. The amounts of the fines and client remediation payments will be determined by the number of improper sales, and the magnitude of client losses, the IIROC settlement notes.
Scota is also implementing a number of enhanced compliance procedures, policies and training modules relating to the documentation and sale of exempt market products. As well, all current branch managers will be required to write or re-write a relevant industry course on exempt market products, and will be trained on new system alerts and accredited investor supervision processes and requirements.
The IIROC settlement credits Scotia for its proactive and exceptional cooperation in the case, including self-reporting the issue, carrying out the internal review, and fully cooperating with the regulatory investigation.