Hiding complaints, compensating clients directly ends in termination and sanctions

A Mutual Fund Dealers Association of Canada hearing panel has issued its reasons for decision in a case where it fined former Sun Life Financial Investment Services (Canada) Inc. dealing representative, Kenneth Russell, $26,000.

Sun Life terminated Russell in February 2020 after it was discovered that he gave inappropriate advice to two clients, hid complaints from his firm, and gave the clients $1,900 directly to compensate them for tax liabilities associated with a fund he recommended.

Russell also admits to completing a know your client (KYC) form on behalf of one of the clients, using information from that client’s spouse, without communicating with the client directly.

Registered since August 2010 before he was terminated (Russell is not currently registered in the securities industry in any capacity), the former dealing representative admits he misrepresented or failed to fully and adequately explain the tax consequences of a mutual fund investment he recommended clients FM and MM purchase in their joint investment account.

“In particular, after being informed by FM and MM that they wished to purchase an investment that offered returns that would be tax deferred into the future, the respondent recommended the CI Investments G5/20i mutual fund and represented to client FM, among other things, that it if they purchased the fund, any taxes payable on distributions received from the fund would be deferred until after the 20-year distribution phase of the fund,” the MFDA’s reasons for decision document states.

Contrary to what he told FM, however, any portion of distributions received in a year that exceeded five per cent was taxable in the year the amounts were received if the investment was held in a non-registered account.

Based on Russell’s recommendation, the clients invested $600,000 and held the investment in their individual Tax Free Savings Accounts (TFSAs) and their joint, non-registered account. The clients complained in 2017 and again in 2019 when they received tax slips informing them that the excess distributions were taxable. “Client FM informed the respondent that he was considering commencing a lawsuit against the respondent and the member to seek compensation for the tax liability.” Russell did not report the 2017 complaint at all, and only reported the 2019 complaint six months after it was made.

“At all material times, the member’s policies and procedures required approved persons to immediately report any client complaint, verbal or written, to their manager no later than two days after being informed about the complaint,” the MFDA states. Policies and procedures also stated that benefits provided to clients must flow through the firm. They also state that approved persons are not allowed to write checks directly to clients. (Russell paid the clients $1,900 directly in June 2019 to reimburse them for the tax liability they incurred in 2018.)

In addition to the $26,000 fine, the MFDA ordered Russell to pay costs of $5,000. He must also complete an ethics or professional conduct course approved by MFDA staff prior to becoming reregistered in the future.