Two advisors traded thousands of orders as clients lost up to 94%, CIRO found
RBC Dominion Securities Inc. (RBC DS) will pay $3.4m in fines, disgorgement and costs after admitting it failed for nearly five years to supervise two advisors whose high-volume futures trading left most of one representative's clients with heavy losses.
A hearing panel of the Canadian Investment Regulatory Organization (CIRO) accepted the settlement agreement on June 18.
RBC DS agreed to a $1.5m fine, $1.8m in disgorged commissions and $100,000 in costs, all payable within 30 days of acceptance.
Between June 2017 and March 2022, RBC DS admitted, it failed to establish, maintain and enforce an adequate system to supervise the futures trading of registered representatives Hongjia Liu and Regan Espeseth.
CIRO said those gaps let both advisors carry out widespread, prolonged discretionary trading across much of their client futures business, even though firm policy did not permit discretionary or managed retail futures accounts.
Under that policy, the agreement stated, advisors had to contact clients before every trade to confirm timing, price, quantity and security, and to complete manual trade tickets carrying four timestamps for each order.
Liu, based in the firm's Vancouver branch, admitted to discretionary trading in the futures accounts of 23 clients between June 2017 and December 2019.
He wrote naked futures contracts in what the settlement described as a "one-size-fits-all" approach, a strategy that capped his clients' gains at the premium collected while exposing them to potentially unlimited losses.
His trading peaked in 2018 with 9,367 orders that generated $4.16m in gross commissions, and produced about $7.48m over the 31-month review period.
On busy days he entered well over 100 orders, at times averaging one every three minutes, leaving little time to reach clients.
All but one of his 23 clients lost money, for combined losses of $8.72m including commissions, ranging from 15 percent to 94 percent of their futures holdings.
Espeseth, based in Saskatoon, admitted to discretionary trading in the accounts of 33 clients between July 2020 and March 2022, with the conduct for one client dating back to 2016.
His trading peaked in 2021 with 24,350 orders and $4.1m in commissions, and generated about $6.25m over his 21-month review period.
Unlike Liu's clients, most of Espeseth's came out ahead.
Together the two advisors entered roughly 38,677 orders in the discretionary accounts and RBC DS would retain about $4.63m, or 50 percent, of the $9.26m in gross commissions those accounts produced.
The regulator also detailed how Espeseth's branch circumvented the timestamp rule.
As early as 2019, the assistant branch manager built an automated system in Microsoft Excel, with the branch manager's knowledge, to replace the manual timestamps.
The team then printed tickets at the end of each day using a single trade-entry time from the CQG platform for all four timestamps, producing falsified records that showed clients had been contacted when they had not.
The branch manager did not flag the change, and RBC DS only learned how the tickets were falsified through the enforcement investigation.
The settlement traced the failures to a two-tier supervision system run centrally from Toronto, with no designated futures supervisor at either branch.
Tier 1 supervisors, who handled most reviews, focused on margin and account balances and relied on manual trade tickets and an equity run report that could exceed 2,500 unsortable pages, according to the agreement.
Tier 2 reviewers had electronic trade data but, during Espeseth's period, concentrated on client priority and front running.
The two tiers did not communicate effectively.
Red flags went unaddressed.
Both advisors' commissions at times ran to more than double those of the next-highest futures advisor at the firm, and the pair often entered orders seconds or minutes apart.
RBC DS acted decisively only later: for Liu, after a client threatened legal action over unauthorized and unsuitable trading; for Espeseth, after the firm's US compliance team raised concerns about his personal trading.
The firm terminated both advisors for cause and reported their conduct to CIRO once each admitted to discretionary trading, the agreement stated.
No client had told the firm that either advisor had entered unauthorized trades before those admissions.
RBC DS has since overhauled its futures supervision.
The changes feed detailed CQG data into spreadsheets to detect discretionary trading, add monthly Tier 1 and Tier 2 meetings, update Tier 2 policies, and require reviews of timestamps and trade tickets.
The designated futures supervisor faced internal disciplinary measures and additional derivatives training.
RBC DS admitted the conduct breached Investment Dealer Rule 3900 and, for the period before January 1, 2022, Dealer Member Rules 38.1 and 2500.
The regulator withdrew an allegation against Peter Fullerton.
