The man filled documents with incorrect KYC information, misrepresented or failed to disclose risks, and made unsuitable leveraging recommendations
The Mutual Fund Dealers Association (MFDA) has prohibited a former advisor in Nova Scotia from conducting securities-related business in any capacity for at least five years, among other sanctions, after finding that he improperly had clients take on a leveraged investment strategy.
In a Notice of Hearing dated May 12, 2014, the MFDA said that between 2005 and 2008, Michael Andrew Harrigan recommended a strategy to his clients wherein they would obtain loans or lines of credit and invest the proceeds in return of capital funds. In certain cases, he advised clients to use the distributions from the funds to make monthly payments on their investment loans.
Harrigan convinced seven clients to pursue the strategy without considering if it was suitable for them. In each case, he populated the client’s account opening and loan application documents with KYC information that would increase the likelihood of their investment loan applications being accepted, as well as the MFDA member firm approving the implementation of the strategy in their accounts.
“[Harrigan] knew or ought reasonably to have known that none of the 7 clients had a ‘medium-high’ risk tolerance … [nor] ‘good’ investment knowledge,” the MFDA said.
Harrigan also inflated income information, overstated assets, or understated liabilities in the clients’ account opening and loan application documents. His clients failed to see the discrepancies because they either signed the forms before he populated the relevant KYC information, or trusted that he had accomplished the paperwork based on the information they had provided.
The MFDA also found that Harrigan misrepresented, failed to explain, or glossed over the risks, benefits, costs, assumptions, and features of the strategy and its underlying investments. These included:
- The fact that a considerable portion of the distributions clients receive may consist of a return of their own capital;
- The risk that the ROC mutual funds might decline in value over time;
- That the clients may not be able to sell the ROC mutual funds to repay their investment loans or cover investment losses;
- That there’s a possibility of the distributions being reduced, suspended, or canceled due to issues such as declining market conditions or poor investment performance; and
- That tax benefits relating to distributions paid by ROC mutual funds may be changed by the CRA and are contingent on the client’s income and other factors.
“During his discussions with clients, the Respondent focused on the positive aspects of the leveraged investment strategy,” the MFDA said. “[T]he Respondent also prepared and relied on personalized spreadsheets … that showed only positive financial outcomes.”
Harrigan was also found to have placed clients in loans that pushed their loan-to-net-worth ratios to unsuitably high levels, ranging from 43% to 96%. All seven clients were reportedly counting on the distributions from their ROC mutual fund investments to service the costs of their investment loans.