With thanks to Ken Kivenko[1]
On July 19, 2023, an agreement (the “Settlement Agreement”) was reached between Enforcement Staff at the Canadian Investment Regulatory Organization (“CIRO”) and John Manuel Reyes (the “Respondent”).[2] A hearing was convened, and the Settlement Agreement received approval pursuant to section 8215 and 8428 of the Investment Dealer and Partially Consolidated Rules of the CIRO.
The following will examine the Settlement Agreement before analyzing what it says about some of the limitations inherent in the Trusted Contact Person (“TCP”) approach.
Facts
The Respondent has been a Registered Representative since 2005 practicing in Calgary since July 2012.
RM and CM (the “Clients”) are a married couple living in Calgary. RM was born in 1969 and previously worked as a production supervisor. In 2008, he suffered a stroke and has been unable to work since. In 2018, he suffered a second stroke. As a result of the first stroke, RM was receiving disability benefits. CM was born in 1971 and previously worked as a quality assurance manager in a manufacturing facility. In 2011, CM was diagnosed with depression and anxiety for which she has been receiving disability benefits since 2011. Both clients had limited investment knowledge and expertise and were each only receiving $36,000 annually in income.
The Clients each held accounts with the Respondent including respective Registered Disability Savings Plan (RDSP) accounts, Tax-Free Savings (TFSA), Registered Retirement Savings Plan (RRSP), a Registered Education Savings Plan (RESP) held by CM, and Locked-In Retirement (LIRA) accounts.
Over a three-year period, the Respondent made unsuitable, excessively risky, investment recommendations for the Clients which resulted in losses of $22,641. The stated risk tolerances on each of the accounts were 40 to 60 per cent medium risk and 40 to 60 per cent high risk which were inconsistent with the Clients’ actual financial situation, investment knowledge and experience.[3] The Clients were fully compensated for these losses by the Respondent’s investment firm, Richardson Wealth Limited (“Richardson”).
By mid-June 2017, the Clients’ accounts were changed from commission-based to fee-based on the recommendation of the Respondent. It was alleged that between January 2017 and January 2020 (the “Relevant Period”), the Respondent failed to exercise due diligence to ensure his investment recommendations were suitable for his clients.[4] As a result, the clients suffered corresponding losses in their accounts in the amount of 21 per cent ($16,138) and 9 per cent ($6,323). During the Relevant Period, Richardson received $16,346.07 in commissions, from which the Respondent received approximately $9,000.
Previous Conduct of the Respondent
This was not the first disciplinary proceeding for the Respondent. In 2018, the Respondent in another settlement agreement, admitted to having failed to exercise due diligence to learn and remain informed of the essential facts, and failed to ensure that investment recommendations were suitable for two clients. He also admitted to having provided personal funds to a client to trade securities through the client’s account, contrary to Dealer Member Rule 29.1. As a result, the Respondent received a two-month suspension, disgorgement of his commissions in the amount of $40,000, a fine of $107,500, and was placed on twelve months close supervision.[5]
The Settlement Agreement
The Settlement Agreement was conditional on acceptance by the hearing panel. Enforcement Staff and the Respondent jointly recommended that the hearing panel accept the Settlement Agreement on the following terms: The Respondent agrees to a fine in the amount of $22,641, disgorgement of his commissions in the amount of $9,000, six months of close supervision, and to pay costs in the amount of $5,000.
Determining Appropriate Sanctions
The panel recognized that not only had the Respondent been disciplined in 2018 for similar conduct, but also that despite sincere efforts to improve his practice, he did not make the necessary changes to the Clients’ accounts in a timely manner. The panel held that “[t]he misconduct in this case was not intentional, willfully blind, or reckless. It was primarily negligent, and there is no evidence that the Respondent made the unsuitable recommendations to earn commission.”[6]
In determining the appropriate sanctions, the hearing panel was referred to the Sanction Guidelines and the following decisions: Re Sabet;[7] Re Laurentian Bank Securities;[8] and Re Ford.[9]
In Re Laurentian Bank Securities, the panel accepted a settlement agreement in which the respondent was being sanctioned for failing to properly train and supervise registered representatives. The respondent in that case had previous disciplinary proceedings and failed to meet its commitment to make certain corrections but had taken proactive steps to become compliant by the time of the hearing.
The panel in Re Reyes felt that the overarching question was whether the agreed penalties fell within a “reasonable range of appropriateness” as described in Re Milewski.[10] The most salient issue was whether the penalties were sufficient in light of the Respondent’s prior disciplinary record. The panel concluded that the penalties were sufficient and that this was not a case of recidivism “because the present contravention was not a repetition of the previous contravention,” but rather, “it was the Respondent’s excessively slow correction of the previous problem.” The panel likened this case to the Re Laurentian Bank Securities decision.[11]
Analysis
Interestingly, Richardson, unlike the Respondent, was not required to disgorge their share of the commissions. They were, however, able to apply the commissions they received against the $22,461 in compensation they paid to the clients.
As shared by Ken Kivenko of Kenmar Associates and Canadian Fund Watch, it is also interesting to see that CIRO was able to conclude that the second violation of the Respondent was not ill-intentioned, willfully blind, or reckless, but rather, too slow to adjust his behaviour to prevent material harm to two vulnerable clients with limited investment knowledge.
This decision ultimately illustrates some of the limitations of the TCP approach to protecting older and vulnerable clients. The TCP approach has been adopted across Canada as part of new regulatory measures to support advisors in their efforts to help protect older and vulnerable investors and their financial interests. Advisors are required to ask clients about adding a TCP to their accounts. The advisor can only contact a TCP based on the written consent their clients give them. Generally, clients can authorize an investment firm to contact the TCP in specific situations, including:
- Where the advisor suspects the client is being financially exploited;
- Where the advisor has concerns about the client’s mental capacity as it related to their ability to make financial decisions;
- To confirm a client’s contact information if the advisor is unable to contact you after repeated attempts and where a failure to contact you would be unusual; and
- To confirm the name and contact information of a legal guardian, executor, trustee, or an attorney under a power of attorney (POA) or any other legal representative.[12]
Concluding Thoughts
In this case, both Clients were older and vulnerable adults living with disabilities and possessing limited investment knowledge and expertise. The facts in this case highlight a significant limitation with the TCP approach in that it doesn’t offer an adequate level of protection in the face of the negligence of a Registered Representative. In this case, it is arguable that the Respondent would not alert a TCP of his own negligence in failing to ensure the investment recommendations made for two vulnerable clients were suitable and not excessively risky and more importantly, consistent with the clients’ actual financial situation, investment knowledge and experience.
Where it concerns the protection of older adults and vulnerable investors, Canadian Fund Watch has provided some actions that Canadian regulators can adopt including:
- Redefining “vulnerable client’ per the United Kingdom’s Financial Conduct Authority’s definition;[13]
- Establishing a Code for the fair treatment of vulnerable investors;
- Requiring a Know Your Client (KYC) update period of one year for vulnerable clients;
- Introducing best-in-class dealer complaint handling rules that empathize with elderly, vulnerable clients;
- Provide objective suitability criteria for the utilization of fee-based accounts;
- Increasing the level of sanction available if a vulnerable investor has been financially assaulted;
- Considering the creation of a Senior’s Helpline based on the FINRA Model;[14] and,
- Making investor compensation a priority consideration.[15]
—
[1] With great thanks to Ken Kivenko for his expertise and assistance in navigating some of the issues that are currently faced by older and vulnerable investors in Canada.
[2] Re Reyes, 2023 CIRO 09 [Re Reyes].
[3] Re Reyes, supra at page 6, para. 15.
[4] The clients had limited investment experience and the Respondent recommended certain high-risk securities to them. The evidence shows that the investment objectives for the Clients’ accounts were stated as 50% income and 50% capital gains. The listed time horizon for each account was long-term, with a target year of 2030.
[5] Re Reyes, supra at para. 20.
[6] Ibid., at para. 21.
[7] 2021 IIROC 3.
[8] 2017 IIROC 38 [Re Laurentian Bank Securities].
[9] 2016 IIROC 31.
[10] [1999] IDACD No. 17.
[11] In that decision, the respondent received an aggregate fine in the amount of $200,000 and had to pay costs in the amount of $20,000.
[12] Ontario Securities Commission and Get Smarter About Money, “Your trusted contact person and why they matter” (August 30, 2023), accessed online: https://www.getsmarteraboutmoney.ca/learning-path/working-with-an-advisor/your-trusted-contact-person-and-why-they-matter/
[13] See Financial Conduct Authority, “Guidance for firms on the fair treatment of vulnerable customers” (February 23, 2021), accessed online: https://www.fca.org.uk/publications/finalised-guidance/guidance-firms-fair-treatment-vulnerable-customers where a vulnerable customer is described as “someone who, due to their personal circumstances, is especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care.”
[14] As shared by Canadian Fund Watch, in April 2017, FINRA announced that the National Adjudicatory Council (NAC) revised FINRA’s Sanction Guidelines to include a new principle consideration titled “Consideration for Vulnerable Customers.” The new principal consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions and makes clear that the Sanction Guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity.
[15] Canadian Fund Watch, “Protecting seniors/vulnerable investors: some basics for CSA consideration” (October 24, 2020), accessed online: http://www.canadianfundwatch.com/2020/10/protecting-seniorsvulnerable-investors.html
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Written by: Brett Book
Posted on: September 29, 2023
Categories: Commentary, WEL Newsletter
With thanks to Ken Kivenko[1]
On July 19, 2023, an agreement (the “Settlement Agreement”) was reached between Enforcement Staff at the Canadian Investment Regulatory Organization (“CIRO”) and John Manuel Reyes (the “Respondent”).[2] A hearing was convened, and the Settlement Agreement received approval pursuant to section 8215 and 8428 of the Investment Dealer and Partially Consolidated Rules of the CIRO.
The following will examine the Settlement Agreement before analyzing what it says about some of the limitations inherent in the Trusted Contact Person (“TCP”) approach.
Facts
The Respondent has been a Registered Representative since 2005 practicing in Calgary since July 2012.
RM and CM (the “Clients”) are a married couple living in Calgary. RM was born in 1969 and previously worked as a production supervisor. In 2008, he suffered a stroke and has been unable to work since. In 2018, he suffered a second stroke. As a result of the first stroke, RM was receiving disability benefits. CM was born in 1971 and previously worked as a quality assurance manager in a manufacturing facility. In 2011, CM was diagnosed with depression and anxiety for which she has been receiving disability benefits since 2011. Both clients had limited investment knowledge and expertise and were each only receiving $36,000 annually in income.
The Clients each held accounts with the Respondent including respective Registered Disability Savings Plan (RDSP) accounts, Tax-Free Savings (TFSA), Registered Retirement Savings Plan (RRSP), a Registered Education Savings Plan (RESP) held by CM, and Locked-In Retirement (LIRA) accounts.
Over a three-year period, the Respondent made unsuitable, excessively risky, investment recommendations for the Clients which resulted in losses of $22,641. The stated risk tolerances on each of the accounts were 40 to 60 per cent medium risk and 40 to 60 per cent high risk which were inconsistent with the Clients’ actual financial situation, investment knowledge and experience.[3] The Clients were fully compensated for these losses by the Respondent’s investment firm, Richardson Wealth Limited (“Richardson”).
By mid-June 2017, the Clients’ accounts were changed from commission-based to fee-based on the recommendation of the Respondent. It was alleged that between January 2017 and January 2020 (the “Relevant Period”), the Respondent failed to exercise due diligence to ensure his investment recommendations were suitable for his clients.[4] As a result, the clients suffered corresponding losses in their accounts in the amount of 21 per cent ($16,138) and 9 per cent ($6,323). During the Relevant Period, Richardson received $16,346.07 in commissions, from which the Respondent received approximately $9,000.
Previous Conduct of the Respondent
This was not the first disciplinary proceeding for the Respondent. In 2018, the Respondent in another settlement agreement, admitted to having failed to exercise due diligence to learn and remain informed of the essential facts, and failed to ensure that investment recommendations were suitable for two clients. He also admitted to having provided personal funds to a client to trade securities through the client’s account, contrary to Dealer Member Rule 29.1. As a result, the Respondent received a two-month suspension, disgorgement of his commissions in the amount of $40,000, a fine of $107,500, and was placed on twelve months close supervision.[5]
The Settlement Agreement
The Settlement Agreement was conditional on acceptance by the hearing panel. Enforcement Staff and the Respondent jointly recommended that the hearing panel accept the Settlement Agreement on the following terms: The Respondent agrees to a fine in the amount of $22,641, disgorgement of his commissions in the amount of $9,000, six months of close supervision, and to pay costs in the amount of $5,000.
Determining Appropriate Sanctions
The panel recognized that not only had the Respondent been disciplined in 2018 for similar conduct, but also that despite sincere efforts to improve his practice, he did not make the necessary changes to the Clients’ accounts in a timely manner. The panel held that “[t]he misconduct in this case was not intentional, willfully blind, or reckless. It was primarily negligent, and there is no evidence that the Respondent made the unsuitable recommendations to earn commission.”[6]
In determining the appropriate sanctions, the hearing panel was referred to the Sanction Guidelines and the following decisions: Re Sabet;[7] Re Laurentian Bank Securities;[8] and Re Ford.[9]
In Re Laurentian Bank Securities, the panel accepted a settlement agreement in which the respondent was being sanctioned for failing to properly train and supervise registered representatives. The respondent in that case had previous disciplinary proceedings and failed to meet its commitment to make certain corrections but had taken proactive steps to become compliant by the time of the hearing.
The panel in Re Reyes felt that the overarching question was whether the agreed penalties fell within a “reasonable range of appropriateness” as described in Re Milewski.[10] The most salient issue was whether the penalties were sufficient in light of the Respondent’s prior disciplinary record. The panel concluded that the penalties were sufficient and that this was not a case of recidivism “because the present contravention was not a repetition of the previous contravention,” but rather, “it was the Respondent’s excessively slow correction of the previous problem.” The panel likened this case to the Re Laurentian Bank Securities decision.[11]
Analysis
Interestingly, Richardson, unlike the Respondent, was not required to disgorge their share of the commissions. They were, however, able to apply the commissions they received against the $22,461 in compensation they paid to the clients.
As shared by Ken Kivenko of Kenmar Associates and Canadian Fund Watch, it is also interesting to see that CIRO was able to conclude that the second violation of the Respondent was not ill-intentioned, willfully blind, or reckless, but rather, too slow to adjust his behaviour to prevent material harm to two vulnerable clients with limited investment knowledge.
This decision ultimately illustrates some of the limitations of the TCP approach to protecting older and vulnerable clients. The TCP approach has been adopted across Canada as part of new regulatory measures to support advisors in their efforts to help protect older and vulnerable investors and their financial interests. Advisors are required to ask clients about adding a TCP to their accounts. The advisor can only contact a TCP based on the written consent their clients give them. Generally, clients can authorize an investment firm to contact the TCP in specific situations, including:
Concluding Thoughts
In this case, both Clients were older and vulnerable adults living with disabilities and possessing limited investment knowledge and expertise. The facts in this case highlight a significant limitation with the TCP approach in that it doesn’t offer an adequate level of protection in the face of the negligence of a Registered Representative. In this case, it is arguable that the Respondent would not alert a TCP of his own negligence in failing to ensure the investment recommendations made for two vulnerable clients were suitable and not excessively risky and more importantly, consistent with the clients’ actual financial situation, investment knowledge and experience.
Where it concerns the protection of older adults and vulnerable investors, Canadian Fund Watch has provided some actions that Canadian regulators can adopt including:
—
[1] With great thanks to Ken Kivenko for his expertise and assistance in navigating some of the issues that are currently faced by older and vulnerable investors in Canada.
[2] Re Reyes, 2023 CIRO 09 [Re Reyes].
[3] Re Reyes, supra at page 6, para. 15.
[4] The clients had limited investment experience and the Respondent recommended certain high-risk securities to them. The evidence shows that the investment objectives for the Clients’ accounts were stated as 50% income and 50% capital gains. The listed time horizon for each account was long-term, with a target year of 2030.
[5] Re Reyes, supra at para. 20.
[6] Ibid., at para. 21.
[7] 2021 IIROC 3.
[8] 2017 IIROC 38 [Re Laurentian Bank Securities].
[9] 2016 IIROC 31.
[10] [1999] IDACD No. 17.
[11] In that decision, the respondent received an aggregate fine in the amount of $200,000 and had to pay costs in the amount of $20,000.
[12] Ontario Securities Commission and Get Smarter About Money, “Your trusted contact person and why they matter” (August 30, 2023), accessed online: https://www.getsmarteraboutmoney.ca/learning-path/working-with-an-advisor/your-trusted-contact-person-and-why-they-matter/
[13] See Financial Conduct Authority, “Guidance for firms on the fair treatment of vulnerable customers” (February 23, 2021), accessed online: https://www.fca.org.uk/publications/finalised-guidance/guidance-firms-fair-treatment-vulnerable-customers where a vulnerable customer is described as “someone who, due to their personal circumstances, is especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care.”
[14] As shared by Canadian Fund Watch, in April 2017, FINRA announced that the National Adjudicatory Council (NAC) revised FINRA’s Sanction Guidelines to include a new principle consideration titled “Consideration for Vulnerable Customers.” The new principal consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions and makes clear that the Sanction Guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity.
[15] Canadian Fund Watch, “Protecting seniors/vulnerable investors: some basics for CSA consideration” (October 24, 2020), accessed online: http://www.canadianfundwatch.com/2020/10/protecting-seniorsvulnerable-investors.html
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