Dealer firm fined for KYC oversight failures

New SRO compliance review finds over 100 clients exposed to high-risk strategy

Dealer firm fined for KYC oversight failures

The New Self-Regulatory Organization of Canada (New SRO) has accepted a settlement agreement with a fund dealer firm after finding it had failed to detect a KYC issue with over 100 accounts opened and transferred in by a former approved person.

As set out in the settlement agreement, GP Wealth Management, a mutual fund dealer registered in Ontario, BC, and Saskatchewan, allowed a former approved person to transfer in his dealing representative registration from another MFDA dealer firm in 2013.

The unnamed person caused 88 client accounts to be transferred in from his previous firm. All 88 of the transferred accounts had implemented a leveraged investment strategy under which clients took on loans and used some of the proceeds to purchase return of capital (ROC) mutual funds – which were subject to deferred sales charges – for their accounts.

In connection with the account transfers, the former approved person submitted new account documents to GP Wealth Management. The transferred accounts had nearly identical KYC information including an investment horizon of “10 to 20 years”; a risk tolerance of “75% to 85% medium-high” and “15% to 20% high”; and, for 79 of the accounts, investment objectives of “80%” or “85%” growth / “15%” or “20%” speculation”.

Between 2013 and 2016, the person also opened and became the servicing dealing rep for 23 new leveraged accounts with GP Wealth. Those accounts were also invested in ROC funds, and nearly all had the same KYC information profile as the 88 previously transferred-in accounts.

Apart from those, GP Wealth also admitted that it “failed to adequately detect and query uniformity in the Know Your Client information recorded by [the former approved person]” for five loan renewals in existing accounts at the firm.

The KYC uniformity issue was uncovered by MFDA compliance staff during a compliance examination, after which the firm made changes in its branch and desk review program in order to, among other things, identify patterns in client accounts in regards to risk tolerance, investment objectives, and investment time horizon.

Noting that and other mitigating factors, the hearing panel approved a settlement agreement with a fine of $20,000 and costs of $5,000.