A Canadian Investment Regulatory Organization (CIRO) hearing panel has accepted a settlement agreement with Red Cloud Securities Inc., after the firm’s representatives admitted to allowing unregistered and unapproved persons to serve clients on its behalf and allowed off-book sales of private placements to retail clients who were not adequately screened to determine if they were qualified to purchase the securities.
Prior to January 2020, Red Cloud was an exempt market dealer regulated by the Ontario Securities Commission (OSC). It became an investment dealer member of the self-regulatory organization, the Investment Industry Regulatory Organization of Canada (IIROC, CIRO’s predecessor organization), limited to servicing institutional clients and was required to give up its registration as an exempt market dealer. In April 2020 it applied to IIROC to obtain approval to service retail investors, an application which was approved in October 2020.
Between January and October that year, however, Red Cloud continued to service retail clients while not yet approved to do so. “In this period, Red Cloud did not have any representatives registered with the required proficiencies to service retail clients,” the settlement agreement states. During the same period, the company is being called out for having inadequate know your client (KYC) documentation which did not meet the regulator’s requirements.
Making matters worse, between February 2020 and August 2021, the company also sold private placements to 192 different retail investors, but failed to maintain a system of controls and supervision that was adequate to ensure clients were qualified to purchase securities. “Further, Red Cloud conducted the private placement transactions off book,” they add.
In addition to a $100,000 fine, the firm was ordered to disgorge $611,306.18 and pay costs in the amount of $15,000.
