After paying out more than $5.7-million to settle with 26 complainants, iA Private Wealth Inc. (IAPW) is being fined $350,000 plus costs in the amount of $25,000 after it self-reported and admitted that it failed to establish and maintain a system to supervise the activities of its employees that would reasonably achieve compliance with Investment Industry Regulatory Organization of Canada (IIROC) rules.
The IIROC hearing panel accepted a settlement agreement with IAPW, under which IIROC enforcement staff agreed to a 30 per cent reduction of the fine it would otherwise have sought because the case was resolved under IIROC’s Early Resolution Offer program. “Enforcement staff agreed to a 30 per cent reduction on the sanctions IIROC would otherwise seek, based on IAPW’s cooperation, the remedial measures implemented, and clients’ compensation to date,” they write.
The settlement agreement states that IAPW failed to properly supervise registered representatives, predominantly Donald (Don) McFarlane, a former director of the firm.
“The underlying activity included unsuitable investment recommendations to clients, high concentration and trading volumes in small issuers and the improper use of margin in client accounts,” IIROC writes in the settlement agreement. “IAPW became aware of these issues following the receipt of multiple client complaints, immediately self-reported the misconduct to IIROC and undertook an internal investigation. IAWP has since entered into settlement agreements with a number of the complainants, implemented revised policies and procedures and implemented a new compliance structure in an effort to prevent similar misconduct in the future.”
McFarlane’s book of business was historically comprised mainly of high net worth and sophisticated clients with a high tolerance for risk. His business generally included the use of margin and investment in higher risk securities, including junior gold companies and private corporate debentures. When supervisors identified instances where holdings in client accounts were unsuitable, McFarlane instead had client forms updated to align with account holdings. “These updates were generally approved without any further inquiries,” IIROC states in the settlement agreement.
After McFarlane passed away, the firm received 30 complaints that variously alleged McFarlane undertook investment strategies that lead to funds being invested in securities that lost significant value over time. Others said that their account holdings were unsuitable, and that McFarlane executed trades, sometimes using margin, without authorization.
“Many of the complainants were professionals and businesspeople. Most of them were high net worth individuals and were identified on their respective new client application forms as having good or sophisticated investment knowledge,” IIROC writes. “All of the complainants had strong personal relationships with McFarlane going back decades.”
The settlement agreement goes on to document instances where McFarlane and his clients accounted for a significant percentage of trading activity in four issuers, saying the firm did not properly identify and address the potential harm that his trading in those shares represented. It says the firm also did not properly identify and address the potential harm caused by the significant trading between client and non-client accounts.
At various times McFarlane’s personal and client accounts were also under-margined, at one point by more than $6-million, including a margin shortfall of over $778,000 in his personal accounts. McFarlane is also accused of repeatedly entering his own trades ahead of those he executed for clients.
To date, the firm has settled 26 of the 30 complaints, has implemented new margin policies, trade review procedures, securities concentration policies and has harmonized its compliance systems. Advisors are no longer permitted to be on the firm’s board of directors. In 2018 it appointed a new Ultimate Designated Person and in 2019 hired a new chief compliance officer.
