Widespread contraventions of Canadian Investment Regulatory Organization (CIRO) dealer rules, self-reported by Scotia Securities Inc., has resulted in the regulator fining the member firm $1-million and assessing investigation costs of $75,000 for allowing approved persons to artificially inflate their performance credits by various means.

Specifically, prior to April 2020, Scotia failed to implement adequate policies and procedures and failed to have an adequate system of controls and supervision, allowing its approved persons to process redemptions and purchases in certain mutual funds, instead of processing those transactions as switches, resulting in the approved persons receiving increased performance credits. Prior to January 2021 it allowed representatives to set up pre-authorized contributions (PAC) and then cancel those PACs, both without client authorization, again resulting in some receiving increased performance credits. It similarly allowed agents to manually adjust their sales results until July 2021.

Operationally the firm is also being sanctioned for failing to ensure that clients purchased mutual funds that were suitable for their non-registered accounts. During the pandemic’s onset it delayed in sending redemption cheques to clients and between November 2021 and February 2022, it also failed to ensure that client account transfer requests sent to a specific fax server were processed in a timely manner.

To remediate the problems identified, the firm engaged Deloitte LLP to assist it with assessing which clients were impacted and to what extent. Subsequently, the firm has paid out more than $10.8-million in restitution to clients and has, in the case of those harmed by the fax server failure, has indicated that clients will be informed if they are eligible to submit complaints if they believe their compensation is insufficient to account for their losses.

Broken down, 46 approved persons processed approximately 757 transactions as redemptions and purchases, rather than as switches. Eight resigned and two were terminated.

In the case of cancelled PACs, 2,421 PACs were set up and consequently cancelled between November 2017 and October 2020; 127 approved persons were identified for further investigation, 31 resigned, 56 were determined to have engaged in conduct warranting discipline and 14 were terminated.

The firm further found 74 approved persons, including eight branch managers had manually adjusted their sales; 13 resigned and it was determined that 65 approved persons performed a total of 8,734 manual sales adjustments. “The respondent was unable to reasonably determine the number of these manual sales adjustments that were adjusted for legitimate and appropriate reasons, as compared to those that were adjusted to receive performance credits,” the settlement agreement states. Of those disciplined in this matter, 18 were terminated.

The firm’s failure to properly process fax server requests, meanwhile, and its failure to process redemption cheques in a timely way, affected 1,702 and 1,331 clients, respectively.

The amounts Scotia has paid out to clients to remedy the failures are also notable. Those affected by inappropriate redemptions and switches, 9,982 clients, have received remediation totalling more than $3.7-million. PAC-affected clients have received a total of $426.64. Of those affected by delayed redemptions checks, 827 accounts have received remediation totalling $740,145. At least $6-million will be paid to those who held inappropriate income-producing investments in their non-registered accounts and approximately 1,702 fax server-affected clients will receive at least $350,000.

Scotia has since sent all of its records to the regulator where staff will independently determine if any further enforcement action is warranted against the individually identified approved persons.