The Investment Industry Regulatory Organization of Canada (IIROC) has accepted a settlement agreement with BMO Nesbitt Burns Inc., wherein the firm admits it failed to adequately supervise the one representative’s activities in two client accounts. In the agreement, the firm agreed to pay a fine totalling $125,000 and costs in the amount of $15,000.

Specifically, the firm admitted to failing to adequately supervise the activities of Paul Brum in his handling of two client accounts that involved high new issue commissions and high turnover ratios which should have raised suitability and conflict of interest concerns.

The high commissions were repeatedly noted in the firm’s monthly commission reports. The trading strategy executed by the representative was also not suitable for the clients in question. “BMO Nesbitt Burns (BMO NBI) failed to query or prevent Brum’s trading in these client accounts in a timely manner and accordingly did not adequately supervise Brum in the circumstances,” the regulator writes. “BMO NBI has an obligation to supervise the activities of registered representatives to ensure that the trading in clients’ accounts is suitable for each individual client. Supervisors are allowed to delegate tasks to others but not the responsibility for those tasks.” 

According to IIROC rules, the firm was obligated to conduct daily and monthly reviews of retail customer accounts to detect excessive trade activity, conflicts of interest and inappropriate or high-risk trading strategies. They add that in circumstances where the concerns were detected prior to January 2017, there was also improper follow up.

IIROC says Brum has entered into his own settlement agreement with the regulator over his unsuitable recommendations. He also contributed $300,000 to a settlement between BMO NBI and one of the affected clients.

In one case, clients lost 20 per cent of their initial investment during the review period while Brum earned $396,542 in fees. IIROC says the short term and frequent trading, along with an emphasis on new issues, was not suitable for the client given her personal and financial circumstances. In the second case, clients lost approximately 35 per cent of their initial investment in their fee-based account. The couple owning the account was charged fees based on the market value of their account of approximately $20,500. It was also determined that the account did not contain investments that met their investment objectives and risk tolerances. “In addition, the emphasis on new issues, which was recommended by Brum, was not a suitable strategy.” 

On at least three different occasions when the firm queried margin account activities and high turnover ratios, Brum simply told the firm that clients were fine with the trades and his handling of their accounts. “Relying on Brum’s response, no further steps were taken,” IIROC states. Brum then left BMO NBI in September 2017.

“Prior to January 2017, while the individuals supervising Brum at the time were trained on suitability and excessive trading they were not adequately trained to consider and failed to appreciate the significance of the high frequency trading in new issues on the suitability strategy of the accounts,” the settlement agreement continues.

All told, in addition to the sanctions imposed by IIROC, BMO NBI paid the clients in question more than $675,000 to cover their losses due to the unsuitable trading. The firm also implemented a new regional supervision model resulting in functions previously performed by local branch management being migrated to a centralized team of supervisors and support staff.