Due diligence failures end in two-year ban and monetary sanctions

A 77-year-old advisor who encouraged a vulnerable couple to borrow against their life insurance policies to purchase a mutual fund with a seven-year redemption schedule, before then setting up withdrawals from the account less than six months later, has settled with the New Self-Regulatory Organization of Canada (New SRO), after admitting he failed in his due diligence obligations.

After accepting a settlement agreement with a New SRO hearing panel, Nazim Mohammed is suspended from conducting any securities related business, in any capacity, with any mutual fund dealer member for two years. He is also ordered to pay a fine in the amount of $15,000 and costs in the amount of $5,000.

According to the settlement agreement, Mohammed, registered since 1993 as a dealing representative with PFSL Investments Canada Ltd., first met his clients when they were already retired. Both were unsophisticated investors reliant on their investments to meet short-term financial needs.

“The respondent did not use due diligence to learn the essential facts relative to clients RM and LM,” the settlement agreement states, adding that he overstated the client’s risk tolerances, the time horizon they had to work with and overstated the client’s investment knowledge on know-your-client documentation. Based on Mohammed’s recommendations, the pair borrowed $19,000 and $11,000 from the cash values of their life insurance policies to purchase a mutual fund with a seven-year redemption schedule.

The representative is also being sanctioned for not explaining the risks, features and material assumptions to his clients, and for not ensuring the pair had a source of savings to fund the mandatory repayments or interest related to the amounts they had borrowed.

Only five months after purchasing the mutual fund, Mohammed then set up a systematic withdrawal plan, redeeming $500 of the couple’s investment monthly for living expenses. Between January 2015 and May 2019 the couple incurred more than $1,059 in deferred sales charge fees. As of April 2020 the clients had not repaid their borrowed cash values. The policies were then cancelled in May 2022 because the couple could not afford to pay the interest charges owed.