The MFDA has fined a Toronto-based mutual fund dealer after it was found that advisors at the firm recommended a leveraged investment strategy to over 200 clients without properly ensuring that it was suitable for their financial situation.
According to the settlement agreement released by the MFDA, approved persons at Shah Financial Planning advised clients to obtain investment loans and use the proceeds to purchase return of capital (ROC) funds that were subject to deferred sales charges (DSC) for their accounts. The strategy assumed that ROC mutual funds would deliver enough proceeds every month to cover the costs that clients would have to pay in servicing their investment loans.
“Between January 2013 and May 2016, the Respondent tripled its leveraged assets under administration (“AUA”) from $12,186,059 to $36,658,987,” the MFDA said. “As at May 2016, these leveraged AUA represented approximately 36% of the Respondent’s total AUA.”
Prompted by the dramatic increase in Shah’s leveraged AUA, as well as deficiencies identified during its third- and fourth-round sales compliance examinations with the MFDA, staff from the regulator conducted a targeted compliance examination specifically relating to Shah’s leverage supervision and practices. The targeted examination was completed in February 2016.
The MFDA found several shortfalls. Notably, leverage review worksheets were completed for clients, but until November 2017 Shah failed to maintain evidence of any Tier 2 supervisory review so as to ensure that the leveraging recommendations received by clients were suitable for their financial situation. The failure to maintain such evidence is a contravention of MFDA Policy No. 2.
On May 11 and 13, 2016, upon the request of MFDA staff, Shah issued directives to its advisors that it would no longer allow the recommendation and implementation of leveraged investment strategies that would put clients in ROC or T-series mutual funds. The firm added that supervisory staff must receive a rationale for any recommendation of leveraged investments to clients going forward.
Shah also contacted or attempted to contact each affected client. On July 16, 2016, the firm sent at least 223 letters to clients who held ROC mutual funds in their leveraged accounts; aside from detailing the outstanding balance of their investment loans and the market value of their leveraged investments, the letters provided options and recommendations on how to rectify suitability issues in their accounts and fully repay their investment loans.
“Of the 223 clients who received the July 16, 2016 letter, three clients complained to the Respondent that they sustained losses in their leveraged accounts as a result of the Leveraged Investment Strategy they had implemented,” the MFDA said. “The Respondent provided compensation to those three clients to resolve the complaints.”
Noting Shah’s cooperation and the fact that it does not have a prior disciplinary history with the MFDA, the regulatory body required the firm to pay a fine amounting to $20,000 as well as costs of $5,000.
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