The Investment Industry Regulatory Organization of Canada (IIROC) has accepted a settlement agreement with Sheron Crane, also known as Sheron Lau, who was an investment advisor with Industrial Alliance Securities (IAS).
“[Crane] recommended and implemented extensive margin use for two clients who she knew had borrowed funds from lines of credit secured on their homes to invest with her,” IIROC said. She faces a $65,000 fine, a 30-day suspension, and six months of close supervision upon re-registration; she must also successfully complete the Conduct Practices Handbook examination and pay costs of $5,000.
One client, CH, first met Crane in October 2014 when she was 64 years old and preparing to retire after a long career with a financial institution. Her investment experience was limited to modest RRSP and TFSA accounts she held with her employer in mutual funds; she also held shares in her employer as part of an employee profit-sharing program. When CH asked about borrowing against her house to invest, Crane explained that it would increase the investment funds available to generate income.
Shortly afterward, CH signed a New Client Application Form (NCAF), which said that she had “good” investment knowledge. “[Crane] incorrectly believed that a client who had previously held a mutual fund portfolio had ‘good’ investment knowledge,” IIROC said, adding that the CH’s employment within a financial institution was also not sufficient basis to make that conclusion.
Within the same month, CH referred the other client, RS, to Crane. During their first meeting, RS was 61 years old and was planning his retirement from his job in auto parts assembly. His only savings consisted of a small RRSP; a pension that he was entitled to get from his employer had a commuted value of around $338,000. He also owned a home he believed was valued around $230,000, though it was subject to a mortgage, from which Crane recommended that he draw equity for a leveraged investment strategy.
An NCAF that RS signed on November 10, 2014 indicated that RS’ investment knowledge was also “good,” which Crane believed based on past discussions about speculative securities and his attendance at an employer-provided investment seminar. But IIROC noted that RS had never held investments other than his small RRSP, that he had limited investment experience, and that the form did not include his major objective of generating income.
Crane opened margin, RRSP, TFSA, and LIF accounts for both CH and RS; she made several margin calls over the course of their engagement. “[Crane’s] extensive use of margin on funds that CH and RS borrowed from lines of credit secured on their homes (i.e. double leverage) was not suitable for them,” IIROC said. Crane also failed to document that they had taken on outside loans, despite IAS policies that highly recommended doing so.
IIROC also found that because of technical difficulties in connecting remotely to her IAS email account, Crane used a personal email address to communicate with CH and RS. IAS policies did not allow employees to use that practice unless they copied their IAS email addresses, which she also failed to do. Because she deleted personal email messages based on age rather than content, she wound up discarding critical client communications.
IIROC also noted a handful of mitigating factors, including modest gains in the portfolios of CH and RS, net of borrowing costs and redemption fees; the fact that Crane engaged in regular account reviews with the two clients; and the fact that Crane cautioned RS against risky investments and depleting his account during the relevant period.
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