A former mutual fund rep has been fined and banned after regulators found that he misappropriated money by using a client’s identity to open and use banking products, including a line of credit.

A hearing panel of the Canadian Investment Regulatory Organization (CIRO) ordered a $100,000 fine and imposed a permanent ban against Dejan Ristovski, a former rep with CIBC Securities Inc. in Calgary. It also ordered $11,000 in costs against him.

The sanctions followed a disciplinary hearing that found Ristovski breached CIRO’s rules by misappropriating money, engaging in undisclosed personal financial dealings with a client, and refusing to cooperate with the SRO’s investigation. He also didn’t participate in the hearing.

According to the panel’s reasons, the misappropriation that took place wasn’t directly from a client. An investigation by the bank found that Ristovski opened a bank account in a client’s name — along with line of credit and a credit card — by forging her signature on the opening documents.

It alleged that he used the line of credit to keep up with alimony payments, ultimately leaving $8,227 owing when the bank closed it. He also charged $500 to the credit card.

The panel called the case unusual in that he didn’t take money from the client — because she never actually had the money — but instead essentially borrowed on her credit.

“Both accounts were in deficit when the bank stepped in to stop activity. These activities may be called a form of misappropriation and could be said to trigger an obligation to account for funds. They may also be viewed as a form of identity theft,” it said.

It also found that he engaged in undisclosed personal financial dealings with the same client, although as “he did not cooperate with [SRO] staff, the exact nature of the dealings between the parties is obscure.”

“However, we are willing to accept the admission that [Ristovski] made as accurate and he was indebted to [the client],” it said.

The panel ordered the sanctions sought by CIRO staff, noting that the misconduct was “extremely serious.”

“The conduct was flagrant and deceptive to such an extent that the panel’s view is that he would pose a serious risk were he to seek to act as a mutual fund dealing representative again,” it said.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

The operators of a failed blockchain development project agreed to pay more than $1.5 million in sanctions and will be permanently banned over an unregistered offering of crypto tokens, which, they admitted, functioned as securities.

The Capital Markets Tribunal approved a settlement with Nicholas Agar and Paul Ungerman, the operators of Axia Project who admitted to violating securities law by distributing securities without a prospectus, trading without registration, and making misleading promotional statements.

According to the Ontario Securities Commission (OSC), the Axia Project raised approximately US$41 million from investors, including $9 million in Ontario, from the sale of crypto tokens Axia Coins. The tokens were supposed to be used as the medium of exchange on its planned blockchain platform. However, the regulator alleged that they promoted the tokens as investments, too.

In the settlement, Agar and Ungerman admitted that the tokens served as securities, that they were issued without a prospectus, and that they traded without registration.

In its reasons, the tribunal noted that the agreement marks the first time the OSC has settled allegations relating to the promotion and sale of crypto tokens, and that the tribunal hasn’t ruled on any cases involving the sale of crypto tokens and whether they count as securities.

“While we have not had the benefit of detailed argument concerning the attributes of the Axia Coin, we are satisfied that the parties to this settlement agreement have admitted and agreed to circumstances that justify the imposition in the public interest of sanctions related to the promotion and sale of the coin and rights to receive the coin in future,” the panel said.

The project’s founders also admitted to making misleading statements about the purported assets backing the tokens — including that it held over US$29 billion in reserves — and to making misleading statements to regulators about the project, which prevented early detection of the misconduct.

In late 2022, the Axia Project was suspended and an outside governance and compliance firm was hired to review it. As a result of that review, in March 2023, the project was terminated and efforts to wind it down were started, with the remaining funds to be returned to investors.

The tribunal said the effort to wind down the project and return money to investors was a mitigating factor in the case, along with the fact that the respondents cooperated with the regulator’s investigation and accepted responsibility for their misconduct by reaching a settlement.

To settle the OSC’s case, Agar and Ungerman each agreed to pay $550,000 penalties. Ungerman agreed to disgorge $318,686 to the OSC, and Agar agreed to disgorge $50,000. Both men also agreed to pay $50,000 in costs.

Ungerman has paid the sanctions ordered against him, and Agar has paid $200,000, with the balance to be paid in nine monthly installments.

In addition to the financial sanctions, they also agreed to permanent trading bans, director and officer bans, and registration bans.

“In our view, given the mitigating factors, the significant financial sanctions, the permanent market bans, Agar’s irrevocable direction, and the avoidance of the time and expense required for a contested hearing, it is in the public interest for us to approve the settlement,” the tribunal said in its reasons.

“The settlement will, in our view, achieve specific and general deterrence and convey a strong message to market participants that compliance with Ontario securities laws is required in the context of the promotion and sale of cryptocurrency tokens.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

A regulatory hearing panel has sanctioned a mutual fund rep for failing to disclose that he was granted power of attorney and named the beneficiary of the accounts of a client, who was also a long-time friend. But the penalty was much less severe than regulators sought.

A hearing panel of the Canadian Investment Regulatory Organization (CIRO) found that Simon Christopher Kelly, a former rep with Investia Financial Services Inc. in Calgary, violated the self-regulatory organization’s rules and his firm’s policies.

In an agreed statement of facts with the SRO, Kelly admitted that he was designated as the beneficiary of a client’s investment accounts, which represented a conflict of interest that he did not disclose to his dealer.

He was also granted power of attorney over the client’s financial affairs, giving him decision-making authority. He didn’t disclose that until his client fell into a coma in August 2019, and Kelly informed his branch manager that he had authority over the client’s finances.

Ultimately, the accounts were transferred to another dealer to address the conflict, but the client died soon after. Kelly was terminated by his dealer at the end of the year.

While the facts of the case were not disputed, the SRO panel was left to determine sanctions. It ordered a $70,000 fine and a six-month suspension, along with $10,000 in costs against Kelly.

The sanctions were far below what the SRO counsel sought. They argued for a permanent ban and a fine of at least $250,000, along with $10,000 in costs.

However, the panel ruled that a much smaller financial penalty and a six-month suspension were warranted.

In its decision, the panel noted that Kelly had no disciplinary record, cooperated with the investigation, and that there was no evidence of coercion or undue influence in the client naming him as beneficiary and power of attorney.

“While we consider the respondent’s misconduct to be serious, we do not find that it is at the highest end of severity which is reserved for conduct which is, for example, deliberately misleading, deceitful or fraudulent or which exploits a client who is vulnerable,” the panel said in its reasons.

The panel concluded that the less severe sanctions would achieve the goal of deterrence and send the message to the industry that “sanctions for misconduct of this nature will be more than just the cost of licensing.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

Many of Canada’s big banks and insurers aren’t on track to meet regulatory deadlines for climate risk management, according to the Office of the Superintendent of Financial Institutions (OSFI).

Guidance around climate risk management issued by OSFI last year set implementation deadlines of October 2024, 2025, and 2026 for various elements.

The federal financial regulator issued a report detailing the results of a survey of financial institutions to assess their readiness for those deadlines, finding that most firms have “started, or have planned work, to manage their climate-related risks.”

Yet some financial institutions “are at very early stages of considering climate-related risks and how they will manage them, and more work is needed to accelerate progress in time for the guideline implementation dates.”

In particular, OSFI found that, while financial firms are making progress at adding climate considerations to their governance processes, they haven’t made as much headway when it comes to quantifying the impacts of climate-related risks.

“Climate-related risks are forward-looking risks, where empirical data and traditional risk management approaches and tools may not sufficiently identify and account for these risks. This could, in turn, lead to an inadequate capture of the potential risks and risk response,” the report said.

Among other things, the regulator found the industry still needs to ramp up its assessments of the impact of climate risks on their other financial and non-financial risks.

For example, about half of the survey’s respondents have assessed less than 20% of their various portfolios for climate-related risks. “This signals that [firms] need to accelerate their assessments across all key risk categories,” the report said.

It also found that financial institutions aren’t yet factoring climate considerations into their capital and liquidity adequacy assessments, and most haven’t started building climate transition plans.

The regulator reported that over 40% of financial firms have started, or plan to, use scenario analysis to assess climate-related risks, “with slightly more progress reportedly made on physical risks than transition risks.”

OSFI also found that between 75% and 85% of respondents said they are using a five-year timeline to assess climate-related risks, with fewer firms looking out longer than five years.

“More life insurers reported examining climate-related risks for longer-term time horizons than [banks] and P&C insurers,” it said. “However, this is expected given the nature of life insurers’ assets and liabilities.”

Despite climate risk assessments being at early stages, most firms indicated they are prepared to meet climate-related financial reporting requirements, the report also noted.

In the meantime, OSFI said it has embarked on several initiatives that aim to help financial firms improve capacity to assess climate risks, including its upcoming standardized climate scenario exercise.

Additionally, the regulator said it will engage with the industry later this year on the results of its readiness survey, while also monitoring evolving practices and standards to assess the need for additional guidance.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

A former investment dealer rep has been fined and permanently banned in a settlement with regulators after admitting to misappropriating clients’ money.

A hearing panel of the Canadian Investment Regulatory Organization (CIRO) approved a settlement with Domino Au-Young, a former rep with National Bank Financial Ltd. (NBF) in Richmond, B.C. The settlement included a $125,000 fine, costs of $7,500 and a permanent ban from the industry.

According to the settlement, Au-Young admitted to misappropriating funds from clients’ accounts, failing to get approval for outside business activity, using unapproved communications methods, and misleading both his firm and the self-regulatory organization in their investigations.

Specifically, regulators found that Au-Young misappropriated US$45,000 from one client and $30,000 from another using forged letters — purportedly from the clients — that instructed his firm to issue cheques to Vancouver Bullion & Currency Exchange, “where he then had the monies transferred into his own bank accounts.”

His firm at the time, NBF, repaid the clients and Au-Young repaid the firm when he was terminated, the settlement noted.

The settlement also said that Au-Young gave false statements about the misappropriations when he was interviewed in NBF’s internal investigation, and in a sworn interview with the SRO’s investigators.

Additionally, he admitted to not getting approval for outside business activity (not related to the financial industry) and that he used WeChat to communicate with several clients, in violation of his firm’s policies.

“The misconduct here took place over a prolonged period of time and was in some instances egregious (misappropriation of funds, deception of the firm and of regulatory investigators),” the panel said in its reasons for approving the settlement.

“In the end, no member of the public was out of pocket, but the damage to the reputation and integrity of the market remained.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

Award-winning advisors should consider scrubbing their online profiles of related entries and celebratory posts, a lawyer suggests, even if regulators may show mercy in their first year of enforcing policies related to referencing awards based on sales, assets under management or revenue generation during client-facing interactions.

“From my conversations with dealers, a small percentage of advisors participate in award contests generally, so I don’t think it’s going to have an outsized impact. I think it’s manageable from a training and compliance standpoint,” said Matthew Latimer, executive director of the Federation of Mutual Fund Dealers, referring to the Canadian Securities Administrators’ (CSA) and the Canadian Investment Regulatory Organization’s (CIRO) recent warning.

Nonetheless, “it’s good that the regulators gave us a heads up in front of our audits so that dealers have an opportunity to get ahead of these potential deficiencies,” Latimer said, adding that he hopes the regulators will be more “understanding and accommodative in the first year.”

Noah Billick, partner and director of regulatory, funds and compliance with Renno & Co., a law firm based in Montreal, said that hope is likely to be realized.

“I only see [award promotion] being an enforcement issue if it’s part of a larger pattern of non-compliance,” Billick said, such as an advisor using their award to gain clients and then take advantage of them in some way. “I think at first, you’re going to get a warning.”

Nonetheless, “my advice would be to take it down,” said Billick, who has previously worked as a financial advisor and chief compliance officer.

The warning also applies to displaying awards in offices, mentioning them in client emails, speaking about awards to clients and referencing awards in media interviews.

Latimer said he hopes any regulatory activity related to this file will be “rolled out in a consistent and harmonized manner across all registrants, to maintain a level playing field as we [continue] to work with our new harmonized SRO.”

Advisors who are only licensed to sell life insurance, however, have not received similar communications about awards and recognition from provincial insurance regulators. In response to a question from Advisor.ca as to whether the Canadian Council for Insurance Regulators would be issuing similar guidance concerning awards, the CCIR reiterated its requirements surrounding the fair treatment of customers and placing customer interests ahead of the advisor’s own.

A joint publication from the Canadian Insurance Services Regulatory Organizations and the CCIR acknowledges that “recognition programs that are designed to increase sales volumes” may “increase the risk of unfair outcomes to customers,” but does not explicitly prohibit referencing them in client-facing interactions.

Joining the President’s Club

Registrants scouring their social media profiles may also want to look for celebratory posts about becoming members of their firm’s “President’s Club” — a club that often requires hitting revenue or AUM goals.

According to the CSA, such posts violate National Instrument 31-103.

“[W]e have specifically stated that if, for example, membership in a registered firm’s ‘President’s Club’ is based partly or entirely on a registered individual’s sales activity or revenue generation, the registered individual who interacts with clients must not use that recognition or award,” stated Ilana Kelemen, senior strategic advisor with the CSA, in an email.

The statement was added to the companion policy to NI 31-103 in June 2022.

“The guidance is quite clear that if there is a sales or revenue component, you can’t promote it,” Billick said. “What I think the dealers will do is find some way to separate [recognition] from those things.”

Latimer said he’s sympathetic to the need for dealer firms to motivate their employees, but stresses that motivation must be done compliantly.

“Members participating in a business should be able to retain recognition and incentive programs for these businesses,” as long as they are fair and justifiable, Latimer said. He added that including revenue generation as a criterion can make sense, as long as the program is “separate, distinct and behind closed doors from clients, where the tailored and professional advice clients need to receive should not be influenced by those factors.”

An industry practitioner in the compliance space with an Ontario-based mutual fund dealer said he agrees with the policy on President’s Clubs, noting that clients often confer more prestige to a title like “president” than may be justified. (Advisor.ca granted anonymity to the practitioner so they could speak without fear of reprisal.)

Billick added that publicizing membership in an organization or association that requires a certain level of production to gain entry — even if it’s not technically an award — could be non-compliant.

However, joining these associations represents “an accomplishment that you have reached a certain level of production,” the compliance practitioner said, lamenting that advisors are losing an opportunity to showcase a hard-earned achievement. “The disconnect is the regulators may be tying [the association membership] to productivity. But achievement and productivity are two different things.”

The practitioner conceded, however, that many clients will simply see the prestigious-sounding name of the association and not ask for the requirements for joining, which could potentially lead to misconceptions.

Billick believes that awards focused on client satisfaction, outcomes and expertise can thrive, pointing out that the law profession has long-running, prestigious awards of this nature that don’t include revenue as a criterion.

But he said the recent guidance from regulators points to a wider push to eliminate what the CSA and CIRO see as conflicts of interest.

“I think regulators are uncomfortable with the idea of how much money advisors make and the way advisors are compensated,” Billick said. “I think regulators would be more comfortable with a model that disincentivized some of the more aggressive sales things that advisors do.”

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.

After partly upholding a rep’s appeal of a disciplinary decision against him last year, Ontario’s Capital Markets Tribunal has now also trimmed the sanctions that were imposed on him.

Last October, the tribunal tossed out one of the allegations against Mark Odorico, a former rep and portfolio manager with CIBC Wood Gundy Inc., who had been accused of unauthorized trading, misappropriating client money and failing to cooperate with regulators.

In 2022, a hearing panel of the Investment Industry Regulatory Organization of Canada (IIROC) found the allegations against him had been proven, and ordered a $125,000 fine, $579,000 in disgorgement, and $25,000 in costs against him, along with a permanent ban.

On appeal, the tribunal found the hearing panel had erred and set aside one allegation that he misappropriated client money.

On Thursday, the tribunal also reduced the sanctions imposed on Odorico, cutting the disgorgement order by $150,000 and reducing the fine by $10,000.

According to the tribunal’s decision, Odorico sought to have all sanctions imposed by the SRO panel reduced, including those not directly related to the allegation that was set aside. He also argued that the costs order should be reduced.

However, the tribunal declined to interfere with most of the sanctions, and didn’t overturn any of the other allegations against Odorico — namely that he also misappropriated $429,000 from another client, engaged in unauthorized trading in their account, and failed to cooperate with the SRO’s investigation.

The reduced disgorgement order reflects that the tribunal set aside the allegation that Odorico misappropriated $150,000 from a couple of clients.

The tribunal also reduced the fine imposed on him by the SRO for misappropriating client money from $50,000 to $40,000, but didn’t alter the other components of his fine and declined to convert his permanent ban into a temporary suspension, or to reduce the costs order.

“The separate fines imposed on Odorico for unauthorized trading ($25,000) and for the failure to co-operate with CIRO’s investigation ($50,000) were distinct from the finding of misappropriation and we see no reason to disturb them,” the tribunal said in its reasons.

“They were not unduly severe in the circumstances,” it said, adding it reduced the fine for misappropriation in proportion to the total amount that was misappropriated (from $579,000 to $429,000).

The tribunal also ruled that the permanent ban “should be upheld on the basis of the surviving contraventions” along with sanctions principles, SRO guidance, previous decisions and the facts of this case.

And, it declined to lower the costs order, noting that it already reflected a significant reduction from the actual costs incurred by the SRO, down to $25,000 from approximately $165,000.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

A proposed class action against several major discount brokers over the payment of mutual fund trailer fees has suffered another blow. An Ontario court again declined to certify the case as a class action, finding that there was nothing wrong with the firms collecting the fees before regulators outlawed the practice.

The Canadian Securities Administrators (CSA) banned the payment of trailer fees to discount brokers in June 2022 on the basis that the fees are paid, at least partly, for ongoing advice that discount firms can’t provide under the limitations of their registration.

A proposed class action against seven of those brokers — BMO Investorline Inc., CIBC Investor Services Inc., Credential Qtrade Securities Inc., Desjardins Securities Inc., HSBC Securities (Canada) Inc., Scotia Capital Inc. and TD Waterhouse Canada Inc. — alleged that they harmed investors when they collected trailer fees for advice they didn’t provide in the years prior to the CSA’s ban.

In January 2023, an Ontario judge dismissed a motion seeking to certify the case as a class action, finding that the plaintiffs couldn’t establish evidence that the firms violated securities laws by receiving the trailers before the CSA changed the rules and banned the practice.

On appeal, the proposed plaintiffs argued that the motion made several errors of law, including that the judge improperly demanded evidence of wrongdoing at the certification stage, and that the allegations against the firms don’t rely on whether the conduct was legal or not.

However, the Ontario Superior Court of Justice rejected those arguments and sided with the firms, dismissing the appeal.

In its decision on appeal, the court said “the motion judge was correct that, in order to perform his necessary screening function at the certification stage, it was necessary for him to examine the evidentiary record with a view to determining whether there was some basis in fact for the proposition that the receipt of trailing commissions by online brokers was contrary to applicable Canadian securities law.”

It found that the motion judge’s “weighing of the evidence on this issue is entitled to considerable deference from this court and is not being challenged by the plaintiffs.”

Similarly, the court found that the motion judge’s decision on whether it was illegal for the discount brokers to accept trailer fees was relevant to the plaintiffs’ other claims alleging that the brokers were negligent and knowingly took improper fees.

“The motion judge considered the evidence of the standards of conduct in securities industry rules and legislation that could possibly underpin a negligence action and found no basis in fact for their existence, as he was entitled to do,” the court said.

The appeal was dismissed and the court ordered costs of $50,000 to the defendants in the case.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

Small firms, including one-person shops, need a business continuity plan, the Ontario Securities Commission (OSC) says.

In an email to chief compliance officers and/or heads of registered firms, the OSC reminded the industry of the requirement to establish plans for handling significant business disruptions — including the sudden death of the head of the firm.

“For small firms and firms with few registered individuals, it is particularly important for the [business continuity plan (BCP)] to reasonably address the impact to clients and business operations in the event of the death, incapacitation or prolonged absence of key individuals,” the regulator said.

The reminder comes in the wake of the collapse last year of a small hedge fund firm, Toronto-based Traynor Ridge Capital Inc., which was forced into receivership after the firm’s only director and officer, Christopher Callahan, died, leaving no one in charge of the firm.

In that case, the OSC cease-traded the firm’s funds and the courts appointed a receiver to oversee its liquidation, amid allegations from several firms that they suffered large losses — estimated at between $85 million and $95 million — when trades with the funds failed to settle.

According to court filings, the Canadian Investment Regulatory Organization (CIRO) alerted the OSC that three firms had suffered losses on failed trades with the Traynor Capital funds, and when the OSC attempted to contact Traynor, it was advised by the firm’s only other employee that “Callahan had gone ‘AWOL’ and [the employee] was not sure what to do next.”

The next day, Traynor’s counsel informed the OSC that Callahan was dead, but counsel “was unable to provide any information about who was in control of the firm following Callahan’s death, and did not expect any such information would be forthcoming.”

“Callahan’s death has left Traynor without [an ultimate designated person] and CCO, contrary to requirements under securities law, and also left Traynor without a director or officer in charge of the firm,” the regulator said in court filings.

“Traynor is frozen, without anyone who has the ability or authority to make decisions on its behalf and/or act on behalf of Traynor with third parties, including counsel, custodians, banks and regulators,” it said.

In the wake of the incident, the regulator is reminding other small firms about their obligations to establish plans for dealing with major operational disruptions, and that they should consider designating an individual to execute these plans — including assigning responsibility for “notifying the regulators in the event of death, incapacitation or prolonged temporary absence of the sole registered individual.”

These plans should also include a succession or wind-up plan in the event of the death or incapacitation of the key person.

“Small firms with only one registered individual and no other support or administrative staff may have to designate a BCP executor external to the firm (e.g., a spouse, relative, legal counsel or another registrant), provided that such external BCP executor has the knowledge, authority and qualification to carry out this responsibility in compliance with securities legislation,” the regulator said.

These kinds of arrangements should be set out in a written agreement so “the BCP executor understands and acknowledges his or her responsibilities,” it noted.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.

A former mutual fund rep was fined and banned after a regulatory hearing panel found she borrowed from a client.

A panel of the Canadian Investment Regulatory Organization (CIRO) imposed a permanent ban on Omadai (Amy) Sukhai, a former rep with PFSL Investments Canada Ltd. in Toronto, and ordered her to pay a fine of $213,509 and $10,000 in costs after finding that she violated the self-regulatory organization’s rules.

The sanctions follow a disciplinary hearing that found Sukhai borrowed money from a client, which wasn’t disclosed to her dealer, and resulted in a conflict of interest that wasn’t resolved in the client’s best interests.

According to the SRO’s allegations, Sukhai began borrowing money from a client in 2017, taking a series of payments that ultimately totalled almost $140,000.

The client, a retired widower, redeemed funds from his RRSP — paying deferred sales charges and taxes — in order to lend the money to Sukhai, the SRO alleged. CIRO also stated the widower took a cash advance from a credit card to loan money to his advisor.

“[Sukhai] deposited some or all of the amounts that she obtained from [the] client into her personal bank accounts, and used the monies to pay her personal expenses,” the SRO alleged, adding that she did not repay the loans.

Sukhai’s firm terminated her in May 2021 after the misconduct was discovered.

The reasons for the panel’s decision have not yet been released.

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.