MFDA finds former dealing rep submitted inaccurate or falsified information on clients' risk tolerance and net worth
The Mutual Fund Dealers Association of Canada (MFDA) has permanently banned and issued a $750,000 fine against Muhamad Asghar Sadiq, a former dealing representative with Sterling Mutuals.
In a notice of hearing, the MFDA noted that Sadiq improperly recommended or placed 10 clients in a leveraged investment strategy between March 2011 and June 2015. Under the strategy, clients would borrow money to invest in return of capital mutual funds (ROC funds).
To follow the strategy, the clients took on loans ranging in size from $50,000 to $250,000.
Taking their annual incomes and net worth into account, those loans resulted in total debt service ratios (TDSR) that ranged from 35.52% to 114.41%, and loan to net worth ratios (LNWR) ranging from 41.67% to 1,477.63%.
“To facilitate the Leveraged Investment Strategy, the Respondent failed to use due diligence to learn or accurately record or intentionally misrepresented the clients’ Know-Your-Client (KYC) information on their account opening documents, net worth statements, and loan applications,” the MFDA said.
The SRO said Sadiq recorded the clients’ KYC information so that his recommendations appeared suitable for the clients – noting their investment knowledge as “good” when they actually had limited knowledge or none, recording their risk tolerance as predominantly high when it was lower, and substantially inflating their annual income and net worth.
He also allegedly submitted supporting financial documents in respect to four clients – including T4 and other pay statements, property tax statements, investment statements, and bank statements – that he knew or should have known contained false, incorrect, or misleading information.
“All 10 clients who implemented the Leveraged Investment Strategy relied entirely upon the distributions generated by the ROC Funds to pay all of the costs of servicing their investment loans,” the MFDA said, noting Sadiq led them to believe the strategy “was a safe and secure manner of investing.”
Sadiq also violated MFDA rules by conducting securities-related business through another MFDA member firm, Shah Financial Planning, which he was not registered with.
He also misappropriated client monies when he encouraged certain clients to invest in a “trading business” he was developing in the latter part of 2016, and engaged in personal financial dealings with clients when he made monthly transfers to help two clients who were spouses with their investment loan payments from August to December 2018.
“Collectively, all of the clients at Sterling Mutuals and Shah Financial described above experienced losses of approximately $449,596. These investment losses have caused significant financial hardship for the clients,” the MFDA said. “The Respondent earned at least $71,000 in commissions form his recommendations to clients to engage in the Leveraged Investment Strategy at Sterling Mutuals.”