Compliance staff approved 88 transferred-in accounts with nearly uniform KYC information, including high risk tolerances and long durations
The Canadian Investment Regulatory Organization (CIRO) has fined a mutual fund dealer firm $20,000 fine for not adequately supervising nearly 90 transferred-in accounts of clients that were placed in a leveraged investment strategy.
The firm, GP Wealth Management Corporation, is registered as a mutual fund dealer in Ontario, BC, and Saskatchewan, according to CIRO’s reasons for decision dated October 20, 2023.
In May 2013, CIRO said an advisor transferred his dealing rep registration to GP Wealth from another dealer firm. The following month, he caused 88 existing leveraged client accounts to be transferred in from his previous dealer firm.
“All 88 of the Transferred Accounts had, at [the advisor’s] recommendation, implemented a leveraged investment strategy whereby clients obtained investment loans and used some of the proceeds of the investment loans to purchase return of capital (“ROC”) mutual funds,” CIRO said. “The ROC mutual funds were subject to deferred sales charges.”
The advisor submitted new account documents to GP Wealth – including signed KYC forms, new account application forms, leverage approval forms, and leverage disclosure forms – between June and August 2013 to process the transfer of the accounts into the firm.
Within that time, compliance personnel at the firm reviewed and subsequently approved the account transfers. The forms reflected nearly identical KYC information for the accounts at the time, including but not limited to:
- The same investment time horizon (“10 to 20 years”);
- “75% to 85% medium-high” and “15% to 20% high” risk tolerance; and
- Investment objectives of “80%” or “85%” growth / “15%” or “20%” speculation” for 79 of the accounts.
Compliance staff at GP Wealth also determined that some of the transferred accounts had a market value below the outstanding amount of the investment loans clients obtained to purchase the investments at the time their accounts were transferred in.
From August 2013 to November 2016, the advisor opened and became the servicing dealing representative for 23 new leveraged accounts – which were also invested in ROC funds, among other mutual funds – which GP Wealth approved. Nearly all the new leveraged accounts reflected the same KYC information as that used for the previously transferred-in accounts.
During this time, the firm also approved loan agreements for 5 existing accounts serviced by the advisor.
“The Respondent did not adequately supervise the Transferred Accounts, the New Leveraged Accounts, or the Loan Re-Writes to assess whether the KYC information recorded by former Approved Person AF was reasonable in light of its uniformity,” CIRO said.
MFDA compliance staff identified the KYC uniformity issue during a sales compliance examination. In November 2016, GP Wealth advised the staff it had terminated AF for falsifying client documents used for leverage loan applications.
After that, the firm updated its branch and desk review program to review KYC and new account application forms to identify patterns risk tolerance, investment objectives, and investment time horizon in client accounts, according to CIRO.
“The Respondent further states that, as of late 2019, its back-office operating system is now capable of automatically identifying patterns with KYC uniformity,” CIRO said.